Introduction
Banking sector is considered as an important source of economy in a country. It is the market
that deals with supply and demand of money by taking people’s deposits and investing or
loaning them. The history of investment banking is way back to industrial revolution when JP
Morgen was the market leader. According to Maverick (2019), the main role of investment bank
consists of merger and Acquisition of companies, underwriting of new stock offered mostly in
IPO and advising companies about their financial activities. The sector is critical for
the industries who could not raise money through conventional ways such as governments. It
helps governments, banks and companies to rise required funds with no threat to fixed interest
expense. UAE has been one the best economies of the world and host to the biggest investment
companies as well. But investment companies are different from investment banks. There is a
difference between both entities where one is underwriter specialist and other one mostly trades
in securities and bonds.
Introduction to investment banking
Investment banking is getting more and more importance in the economy of a country as a result
of its impact on money market of a country (Baig, 2019). They play important role in generating
funds for IPOs as it is easier for the companies to sell their stocks in market to a single entity
rather than masses especially when doing it for the first time. Aggarwal, Prabhala and Puri
(2002) found an evidence supporting that a large portion of shares issued by the companies are
being held by financial institutions in the form of underwritings. IPO can be profitable for
generating required cash for smoothening the business activities of a company. It has been found
that they are also providing brand awareness of company to general public (Demers & Lewellen,
2003). As companies are in initial positions of offering the funds to the general public, the cost
of finding information about the company individually would be high causing less investment by
the people in IPOs. Investment banks can achieve this at lower price by achieving economies of
scale Boyd & Prescott, 1986). The growth of financial institutions is mostly measured by private
credit and market capitalization but for investment banking these measuring techniques are not
applicable (Schröder et al., 2012). Hartmann et al. (2007) provided a better way of measuring the
performance of investment banks. According to them it can be measured by financial innovation
and completion of the market. They argued that it can be found by the amount of money spent by
the bank on new venture financing. One of the greatest roles performed by investment banks is
merger and acquisition. It is a process that can help to generate economy benefit in the country.
For example, in 2000, merger and acquisition accounted for 11% of GDP of the country. As a
specialist of M&A, investment banks can help companies to get into negotiations. The other role
provided by the investment banks is to conduct surveys in order to provide information about the
availability and price of companies to its customers who wants to do mergers. Merger
and acquisitions can play important role in a firm. According to Sorensen
(2000), companies acquire market power through acquisitions. Sometimes acquisitions take
place when inefficient management is working in an organization and it is replaced by an
efficient one.
Investment banking in UAE
Investment banks in UAE also provides a lot of services in the region. It has been found that
merger in UAE is found profitable in term of shareholders wealth in the year of merger
(Fernandez & Kumar, 2014). The middle east region is getting more and more in mergers
and acquisitions deals. In year 2012, 398 deals had been taken place and increased to 442 in the
year 2013.
UAE economic and investment market
UAE was once oil-based economy, but the visionary leaders have seen that the oil will diminish
one day, and they converted their economy from oil-based to investment based by investing
heavily in infrastructure and tourism. As a result of that, UAE is one of the largest economies in
the world with GDP of $421,141. As it is one of the free economies, foreign investment is also
encouraged in the country with investment of $10.3 billion was done in 2018 2. The resulted
growth created new job opportunities in the country and increased the living standard of the
citizens. UAE also brought head offices of many firms in the country including international
banks. According to the dnb.com, there are 70 main investment banking companies working in
UAE with lot of international banks such HSBC, The Bank of New York Mellon, and Deutsche
Bank. As country is enjoying every low interest rate (1.25% p.a. 3). This inspires the individuals
and companies to invest the available cash and savings with investment banks in order to
generate higher ROI. The banks have option to earn better returns in investment rather than
managing deposit accounts. One of the reasons for low interest rate offered in the country is its
low inflation rate that was reported 0.43% in 2019. The low inflation rate discourages the saving
accounts. As a country with lot of business potential, investors come from different region to
invest in the UAE. Most of them depends on local investor to support them financially in their
business startups. It is mostly done in the form of merger and acquisition. Mergers and
1
https://tradingeconomics.com/united-arab-emirates/gdp
2
https://u.ae/en/information-and-services/finance-and-investment/foreign-direct-investment#:~:text=Foreign
%20Direct%20Investment%20(FDI)%20in%20the%20UAE,-According%20to%20the&text=The%20value%20of
%20FDI%20inflow,to%20Arab%20countries%20in%202018.
3
https://www.ceicdata.com/en/indicator/united-arab-emirates/short-term-interest-rate#:~:text=The%20data
%20reached%20an%20all,1.25%20%25%20pa%20in%20Oct%202020.
acquisitions also found to be beneficial for companies that are bidding in form of stock price.
According to a research conducted by Asquith, Bruner and Mullins (1983), companies that bid in
the merger generate positive returns in share market for a duration of 21 days. UAE is a Muslim
state and has a well-developed Islamic banking system. As a system based on Islamic ideology,
Islamic banking has its own fundamentals of investment banking. The main options available are
Modaraba, Musharaka and Mubaraha. A research has been conducted by Kalim and Arshed
(2018) to find the social efficiency of Islamic banks of UAE. The research used well established
banks in islamic countries. The sample the take was 53 banks. The data was analyzed between
the year of 2001 to 2015. The analysis showed that Modaraba is the best institute used for
islamic investment banking to make them efficient. They also argued that if the market
conditions are favorable, company can generate better efficiency using it. According to the data
provided by the research, 53% of the islamic investment banking system in UAE is based on
Murabahah. It is a contract barring that the bearer will be able to receive the original cost plus
the amount that has been discussed in advance.
Foreign Banks in UAE
There are a lot of foreign banks working in UAE from conventional to investment banks but
some of the famous banks are more dominant in industry such as HSBC, Morgan Stanley Co
International, and Barclays Investment Bank. Foreign banks are performing really good in latest
years. These are the banks that are owned by foreign companies. Foreign banks show the
diversity of a country and are considered as an important part of foreign direct investment.
Measuring profitability of investment Banks
Measuring the profitability of a bank is an important factor of the industry. As investors are more
and more concerned about the profitability of banks in order to make the decisions. According to
Cover (1999), the need of profitability analysis in a bank sector has become more important as of
before. Measurement of some foreign investment banks are given below.
1. Standard Chartered
Standard Chartered is almost 150 years old. Today company is having more than 85,000
employees working worldwide. It has been listed on two of the largest stock markets in Asia. SC
is currently working in more than 60 markets. In UAE, company enters in 1958 with its first
branch in Sharjah.
Standard Chartered
400,000
300,000
200,000
100,000
-
(100,000) 2017 2018 2019
(200,000)
The company wrote in profit of 294,058,000 AED in year 2019. This means company has
performed extremely well as compared to previous years.
2. Morgan Stanley
Morgan Stanley is operating in Middle East from 1970s and started its operations in UAE in
2006. It has been awarded as best merger and acquisition firm in 2010. It is one of the largest
financial service firm in more than 30 countries with more than 600 offices. The investment
banking of the company wrote the profit in consecutive three years.
Morgan Stanley investment
banking in millions
20000
15000
10000
5000
0
2017 2018 2019
3. Barclays investment bank
Barclays have its traces back to 1690 with association with Barclays name in 1736 by James
Barclays. It established its office in Dubai in 2005 and offering a wide range of services such as
corporate finance, advising on the investment of merger and acquisition. The financial perform
of company’s last three years is.
Barclays UAE
20000
15000
10000
5000
0
2017 2018 2019
4. HSBC
Started their international business in 1865, HSBC is having customer base of more than 40
million and serving in more than 64 nations. They do research and analyze companies for the
customers. The three years financials of HSBC.
HSBC
20000
15000
10000
5000
0
2017 2018 2019
5. Deutsche Bank
A German based multinational bank with operations in more than 20 countries. It entered in the
market of UAE back in 1999 with a regional office in Abu Dhabi.
Deutsche Bank Investment
1600
1400
1200
1000
800
600
400
200
0
2017 2018 2019
Bank’s overall investment performance is seeing to be declining indicating that bank is having
problems in playing its role in investment banking industry. The loss occurred because of lower
revenue generated by the company and high expenses incurred to generate even those revenues.
Results
According the graphs representing the famous banks working in UAE which are owned by
foreign companies. All these banks are performing their activities in UAE and have a rich
background history some of them going back to the start of banking system. UAE has a strong
local banking system with about 21 banks operating locally or government bank subsidiary. This
gives a tough competition for foreign banks to penetrate the market with standard products that
are already available in the country.
Conclusion
UAE have potential of investment in merger and acquisition and also in underwriting. But as the
country is well in self-investment and government owned investment banks have major shares in
investment banking activities. Banks owned by UAE government and by locals are doing well in
performing merger and acquisition activities and it is difficult for international banks to be
market leaders in the region. Companies are getting market, but as local banking system has a
strong base, it will require a lot of time for them to penetrate it. Overall the companies are able to
generate profit after taxation, but it will require a lot of products and services to convert these
investments into future cash inflows.
References
Aggarwal, R., L. Krigman and K. Womack (2002), “Strategic IPO underpricing, information momentum, and
lockup expiration selling”, Journal of Financial Economics 66:105−137.
Asquith, P., Bruner, R. F., & Mullins Jr, D. W. (1983). The gains to bidding firms from merger. Journal of
financial economics, 11(1-4), 121-139.
Boyd, J. H., & Prescott, E. C. (1986). Financial intermediary-coalitions. Journal of Economic theory, 38(2), 211-
232.
Cover, J. (1999). Profitability analysis-a necessary tool for success in the 21st Century. ABA
Banking Journal, 91(2), 78.
Demers, E., & Lewellen, K. (2003). The marketing role of IPOs: evidence from internet stocks. Journal of
Financial Economics, 68(3), 413-437.
Fernandez, M., & Kumar, R. (2014). The Effect of Merger on Performance: Evidence from the UAE. Ethiopian
Journal of Business and Economics (The), 4(1), 83-115.
MAVERICK, J. (2019, July). The Roles of Investment Banks. Retrieved December 04, 2020,
from https://www.investopedia.com/investing-essentials-4689754
Schröder, M., Borell, M., Gropp, R., Iliewa, Z., Jaroszek, L., Lang, G., ... & Trela, K. (2012). The role of
investment banking for the German economy: Final report for Deutsche Bank AG, Frankfurt/Main (No. 12-01).
ZEW-Dokumentation.
