International banks stress their commitment to the Gulf region and local houses insist they will continue to lend to support sagging economies, but syndicated lending has nonetheless plunged this year.

So far this year, only $22.8bn of syndicated loans, project finance and bonds have been issued in the Middle East, down from $85.5bn last year and a peak of $126.9bn in 2007, says Dealogic, a data provider.

The slump is understandable. International banks are under pressure from investors to cut lending, and many governments want their banks to favour the home market, rather than the Middle East.

Local banks are faring somewhat better, but are facing a region-wide property correction, rising loan impairments and painful investment losses.

Still, regional banks have increased their market share of big-ticket lending this year. Of the top 10 bookrunners of syndicated loans this year, seven have been local – up from just two in 2008 and 2007.

“Foreign lenders are making safe bets, if they’re making bets at all,” says Jarmo Kotilaine, chief economist at NCB Capital, the investment banking arm of the Saudi bank. “The local financial institutions are also very cautious, but they don’t have any other markets to lend to.”

Saudi banks – relatively healthy compared to many regional and international peers – are the most active syndicated lenders this year, led by Banque Saudi Fransi and Al Rajhi Bank’s two $833m loans. Dubai-based Mashreqbank, Dubai Islamic Bank and Emirates NBD have also been active, each with two deals worth about $1.5bn in total.

Bankers say the three Dubai-based institutions were most likely compelled by the emirate’s government to help out on important bond refinancings this year, such as Borse Dubai’s $2.5bn loan in February.

International banks, however, remain pivotal suppliers of credit in the Middle East. Calyon, the investment banking arm of Credit Agricole, has been the most active lender, with six deals worth $1.3bn, followed by Standard Chartered, which has lent $933m.

Interestingly, Royal Bank of Scotland, the partially nationalised UK bank, has continued to be an active bookrunner in the region. While the bank is under pressure to shrink its balance sheet, it does not face any explicit restrictions on lending overseas, and RBS has identified the Middle East as a “core region”.

A senior investment banker says it makes more sense for international banks such as RBS to make lucrative big-ticket loans to sovereign or sovereign-backed entities such as QTel, which are “never” going to default, than smaller, less profitable and riskier loans to domestic consumers and companies.

One notable casualty from the lending league tables is HSBC, the largest international bank in the region. Last year HSBC was the Middle East’s largest bookrunner, with $5.5bn of syndicated loans, and in 2007 the bank provided Middle East borrowers with $7.5bn, according to Dealogic. This year the bank does not appear among the top 20 lenders.

“There is also a lot of bilateral lending going on, which won’t appear on the league tables,” Rajiv Shukla, head of debt capital markets at HSBC Middle East, points out.

Regional risks are also depressing syndicated and bilateral lending. Two Saudi conglomerates – Saad Group and Ahmad Hamad Algosaibi & Brothers – have defaulted on their debts.

Both local and international banks are therefore likely to prefer the relative transparency of syndicated lending and bonds, and safety of government-related borrowers.

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