DUBAI, Sept 21, (RTRS): The good times long gone, many Gulf brokerages are under pressure to consolidate as slumping market turnover and weak asset values put their survival in doubt.
Obstacles to tie-ups and mergers abound in a region where most announced deals end up failing. But brokers are finding they may be left with only one other option — outright closure.
“The regional brokerage industry has to consolidate,” said Anthony Mallis, chief executive of Bahrain-based investment bank Securities & Investment Co (SICO).
“There is gross overcapacity in at least three out of the six Gulf markets, and certainly in these markets it is pretty obvious that a number of brokers are insolvent.”
Once a shining symbol of Dubai’s investment banking prospects, the emirate’s Shuaa Capital said last week that it would hunt for a potential acquisition rather than wait for markets to turn around. It is seeking ways to boost revenue amid a slump in its home market.

Acquisition
“The company expects that any potential acquisition would boost its revenues and create cost synergies that will have a positive impact,” Shuaa said.
The investment bank, which took blue-chip companies such as DP World public during the boom years, is in talks with a number of target companies for potential deals, it said.
Shuaa has looked at HC Securities and Beltone Financial in Egypt as potential candidates, sources told Reuters.
Other brokers are likely to follow the same path or shut down operations, analysts say, as the Gulf’s securities industry shows no clear signs of revival from a slump triggered by the 2008-2009 global financial crisis and a crash of real estate and other asset prices across the region.
While the Gulf’s economic growth has revived since the crisis, local and international investors have been reluctant to push asset prices in the region back up with the global economic climate still uncertain.
Ninety brokerages are licenced to trade the two domestic bourses in the United Arab Emirates, Dubai Financial Market and Abu Dhabi Securities Exchange, according to the Securities and Commodities Authority. But this number may now have fallen by more than half as many of them have asked for their licences to be suspended or have shut themselves down completely, securities analysts say.

Slump
Turnover on Dubai’s bourse is set to slump to a seven-year low in 2011, with this year’s annual traded value likely to be less than a fifth of that of 2008. Its benchmark index is down about 10 percent year-to-date and some 80 percent below a 2008 peak.
The exchange has not seen a single initial public offer of shares in more than three years.
“Given the fall-off in volumes from 2008, we expected an accelerated period of consolidation, especially in the UAE,” said Akber Naqvi, executive director at Dubai-based Al Masah Capital.
Naqvi said the consolidation was not so far happening as fast as he had expected. But since the top five brokers in the UAE control more than 80 percent of market share, there is considerable room for further consolidation, he and other industry experts said.

Even larger markets such as Saudi Arabia have not been immune from the slump. Regulators have given licences to about 60 brokers which are competing with banks for a share of trading volume which has shrunk considerably in the last few years. The Saudi index is down 8 percent so far this year.
Bahrain, the small Gulf Arab state where not a single company trades on a daily basis, has around 12 brokers; Oman has over 20 brokerages operating.
“The sad part is that the downturn has been across the board. There is no market in the Gulf you can look at and say, we need to be there,” said one Muscat-based securities analyst who declined to be named as he was not authorised to speak to media.
Larger players in the region, such as Egypt’s EFG Hermes, can help consolidate the industry by snapping up smaller rivals, experts say. EFG has been hurt by the political instability within Egypt but this may only encourage it to expand into the Gulf.
However, the desire to consolidate is often not enough to complete transactions in the region.
Although valuations are near long-term lows, sellers’ perception of value can be much higher, and unwillingness to give away control may also hamper deals.

Reluctant
Political considerations have been a major factor slowing consolidation across the region as most Gulf states are reluctant to give away control of their local firms. There has not been a single large merger of brokerages in the past couple of years, analysts say.
“There is also the logic that since we may have reached the nadir of trading volume, we might as well wait this out until the next wave of growth,” Naqvi said.
In this environment, pressure from market regulators in the region may be needed to help force consolidation. Last month, Oman’s Capital Market Authority said it was “seriously considering” steps to encourage mergers of brokers.
“In many other non-GCC (Gulf Cooperation Council) markets, regulators would have just pulled the plug and asked entities to close down, or where there was a viable case, to be forcibly merged,” SICO’s Mallis said.
Regardless of official encouragement, the next wave of growth in the sector, when it eventually comes, looks likely to be witnessed by many fewer participants than than the last one.
“Players with healthy cash reserves, better technology, greater market access, innovative product lines and loyal customer bases will be the ones left standing at the end,” Naqvi said.