HSBC confident about Gulf property sector exposure despite war volatility

British lender HSBC is not worried about its exposure to the slowing property sector or the health of its corporate loan book in the Gulf region despite the war-driven economic contraction this year, its group chief executive has said.

The provisions, just shy of $400 million for potential loan losses, taken so far by Europe’s second-largest lender for its Middle East exposure, are “benign”, and the bank is ready for challenges if they arise, Georges Elhedery told The National in an interview before the bank’s third-quarter earnings.

“Of course, the short answer is I'm not worried. But, as you would expect, we keep monitoring the situation very closely,” Mr Elhedery said on the sidelines of HSBC’s 10th annual Future Forum in Dubai last week.

“You may have idiosyncratic challenges that may appear. You can't rule them out but some of them likely will be in the normal course of business, and not necessarily related to the [geopolitical] situation”, he said.

The US-Iran war, now in its eighth month, severely disrupted economic momentum in the early days of the conflict as Tehran launched waves of drone and missile attacks on civilian and energy infrastructure of its Arab neighbours.

Retail, aviation, hospitality and tourism as well as real estate were among the worst-hit sectors in the region.

Fighting has decreased since early April, but a US naval blockade on Iranian ports remains in place. Tehran's restrictions on merchant ships and tankers in the Strait of Hormuz continue, amid frequent retaliatory exchanges and maritime skirmishes with Washington's troops.

Efforts by Qatar, Pakistan and other mediators to broker a peace settlement between the warring parties have so far failed.

Last week, the International Monetary Fund said Gulf economies on aggregate are set to contract 4.8 per cent this year as the Iran war disrupts energy exports and weighs on non-oil activity. The multilateral lender, however, expects a 9.1 per cent rebound in 2027.

The latest forecast marks a sharp divergence of 6.8 percentage points from the 2 per cent expansion it projected in April, according to the IMF’s Regional Economic Outlook. Regional economies expanded by 4.5 per cent last year, driven by property, construction and tourism sector-fuelled gains in the non-oil economy.

HSBC, which is among the major providers of corporate, project and home financing in the Middle East, faced loan losses, increased provisions, asset write-downs, sliding profits last year due to its exposure to Asian property markets, primarily in Hong Kong and mainland China.

In the Gulf region, however, the “good responsiveness” of sovereigns and the financial policymakers helped mitigate risks.

“Fiscal support where it was needed” also allowed resumption of economic activity after severe disruption in March, and with the rebound already underway “there is therefore no cause to worry”, Mr Elhedery said.

Strong bounce back

Despite the economic contraction this year, HSBC is optimistic about the short to medium-term outlook for the region, as there is a clear push by the Gulf sovereigns to offset the impact of the war on their economies and build “resilience at pace”.

“It knows how to respond to the challenges quickly and has the agility to adjust,” Mr Elhedery said.

Like any other problem the region has faced, including the lockdowns during the Covid-19 pandemic, policymakers will effectively deal with the closure of the Strait of Hormuz, “which may, by the way, become redundant over the next five years”, he said.

Continued investments in “all the resilience and redundancies being built to create a more sustainable and robust business model” will ultimately make the narrow waterway, through which a fifth of global oil and gas passed before the war, less important, he added.

The last decade, Mr Elhedery added, has shown that “you can be very efficient operationally, but exogenous events, can knock you off course”, and these events can “take away 100 per cent of your earnings”.

“This Middle East conflict is emphasising the importance of spending money on operational resilience,” he said. “I think the Middle East has done a lot of that already, but clearly there is much more going on now because of this conflict.”

The financial strength and the economic vision of the leadership, as well as its “will to rebound” is what makes HSBC believe the rebound can be fast, and “we want to lean in to support it, and our clients”, he said.

Changing risk profile

The US-Iran war, which began on February 28, has turned into a multi-front conflict, with the Iran-backed Houthi rebels in Yemen launching missile and drone strikes on Saudi Arabia’s energy and aviation infrastructure on a daily basis.

The kingdom, Opec’s largest oil exporter, is also facing a naval blockade and maritime embargo aimed at Saudi and international shipping through the Bab Al Mandeb strait and the Red Sea.

But even with the Houthi dimension adding another layer of uncertainty to the region’s risk profile, Mr Elhedery said HSBC remained optimistic about growth prospects.

“It's actually never been, frankly, a singular risk and, of course from time to time, items [events] pop up to top the agenda,” he said.

“One has to keep in mind that the geoeconomic considerations have always been quite complex. Some of them ebb and flow, but that complexity has always been there, and our mission is to help clients navigate this complexity, but not stereotype it.”

Impact on business

Although HSBC has taken first-half provisions of about $400 million against possible loan losses, the “majority of these provisions are modelled on economic outlook and growth outlook”.

“So, de facto, we have seen very little, literally insignificant impact on our business directly related to the conflict, and our focus has been on operational continuity and serving our clients throughout, and we haven't skipped a beat doing that,” the chief executive said.

"If you look at the entire year, actually our businesses have been resilient, both on the revenue and profitability front, the impact has been very low, single-digit per cent, on the overall business."

He added that although equity capital market activity throughout the region slowed this year, there are signs of revival and "we are in the market now with the first IPO since the events [of March]".

"The indications are very good, the appetite is strong," he said.

HSBC is among local and global banks working on the Dubai Investments' bid to sell a 20 per cent stake in its subsidiary DIP Holding in the first initial public offering in the UAE this year.

"Of course, in a period like this, you would see less public activity and more private activity, so what used to be debt capital markets sometimes may become private placements," he said. "What used to be ECM sometimes becoming more M&A, but that is a normal reaction to these events."

Show caption: HSBC’s flagship Jumeirah Branch hosts its new wealth centre.…

Infrastructure boom

The next phase of growth will be driven by the infrastructure boom. The broader Middle East, North Africa and Turkey region already has close to $900 billion in infrastructure financing requirements.

HSBC estimates that the project finance pipeline in the UAE alone is more than $190 billion, about 22 per cent of the Menat total.

The HSBC-commissioned analysis of MEED data released last week has identified an $872-billion pipeline of individual project packages within a wider $1.4 trillion pipeline of planned and unawarded infrastructure projects.

The value of planned but unawarded infrastructure projects and programmes increased by 54 per cent between January 2023 and January 2026, from $792 billion to $1.22 trillion, data showed.

The sheer size of the infrastructure financing basket opens up new avenues of business for financial institutions that have been waiting for the better part of this year for the lull in the regional capital markets to end.

"We, as a bank, are a financing bank, an infrastructure bank, an underwriting bank and a structuring bank. We have a whole skill set to support how these projects are designed … and financed," Mr Elhedery said.

"The pie is huge as there is massive appetite [from project owners for funding] and there will be more appetite [in the future]. There is a substantial opportunity to be involved, and we're extremely pleased."

Sharia fund controversy

HSBC in recent weeks has faced investor criticism over some of the investments its Islamic Global Equity Index Fund has made, and Mr Elhedery said the bank is trying to address those concerns as best and as quickly as possible.

The $9-billion fund, which tracks an index, is the top Sharia-compliant fund in the UK. The investment vehicle has bought shares in companies linked to the US and Israeli defence companies including US tech giant Palantir, prompting several investors to raise concerns with HSBC.

"We take client and investor concerns very seriously," Mr Elhedery said.

The bank, he said, had already set up a working group, which includes index providers and independent Sharia experts who have begun the review. HSBC is moving at pace and aims to resolve the matter swiftly, which could mean a revision of some of the filters used.

"I don't want to preempt the outcomes, but … but we intend to reach a satisfactory conclusion."