“To move or not to move?”

Preliminary analysis of the case of Bank Audi

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This spring there was considerable commotion in Lebanese economic and financial circles as rumors surfaced that the country’s largest bank was engaged in scenario exercises about moving its corporate head office to Abu Dhabi in the United Arab Emirates.

The question of the advantages and disadvantages of such a significant relocation decision motivated Philip Karam, who studies economics at the John Molson School of Business, Concordia University, in Montreal, Canada, to execute research from the viewpoint of what advantages a move could provide to the bank and how the Lebanese government could incentivize the bank to remain in the country.

Executive attained access to the research paper, of which we bring you a shortened version. We note that the paper does not address questions such as employment and job creation. We also acknowledge that Bank Audi, which recently increased its footprint in Lebanon by taking up additional office space in downtown Beirut and also through launching a new SME division at its Lebanon unit on August 25, emphasized already in May that nothing was decided in terms of moving.

“If and when a decision is made, in keeping with its disclosure policy and applicable legal requirements, Bank Audi will make an announcement. Until that time, any discussion is pure speculation,” the group stated in an announcement.

The pros and cons of relocation

The possibility of a headquarters relocation by Bank Audi, the largest bank in Lebanon and a lender with operations in 12 countries, is the subject of our investigation. The analysis will be based on established ideas in the field of organisational theory on headquarters relocation. These ideas contend that HQs move overseas in response to changes in the internal configurations of the firm’s activities and the demands of the product markets in which it operates; or as a response to changes in external factors that have to do with global financial markets and shareholders’ composition and concerns.

Additionally, the HQ move must make sense by involving three sets of gains: efficiency gains arising from being close to the center of gravity of the business; strategic gains that stem from knowledge spillovers and access to better technical and financial resources, especially if the new location is a leading-edge cluster; and symbolic gains that accrue to the firm by demonstrating to stakeholders that the business is global in its location and outlook.

Bank Audi’s presence in the UAE is currently limited to a representative office in the capital Abu Dhabi, which is where it is thinking of moving its HQ. The UAE has of course become the financial and business hub, not just for the Gulf region, but also for the Arab World and probably for South and Central Asia. So as a first impression, it sounds like a good move to relocate Bank Audi’s HQ to the UAE capital. But such a momentous step should not be based on first impressions, but rather be subject to rigorous evaluation of the factors that could be driving it, internal and external.

Of the internal factors, the most plausible is that the bank should move in the direction where its business is increasingly concentrated: the greater the share of business activities located overseas, the greater the possibility of HQ moving there. However, on closer inspection, this factor is not good enough in the case of Bank Audi. Lebanon remains the place where the bulk of the bank’s activities and profits are generated: 52 percent of assets and 49 percent of profits, to be exact. If anything, the bank should be considering moving its HQ to Turkey, as it is its fastest growing and second biggest market, with assets exceeding $10.5 billion. Moving to Abu Dhabi, where the bank has hardly any presence, does not make much sense in this regard and the bank’s chances of reaping any firm-specific advantages are minimal.

Another crucial internal factor is the attraction of a new location characterized by growing possibilities, hub-like economic advantages, and a hospitable investment environment. In this sense, the more attractive the host country’s business climate is perceived to be, the greater the likelihood of the firm moving its HQ overseas. This is surely true of the UAE and its capital city, for their magnetism is multifaceted: an agglomeration of related business activities, a supporting political and regulatory environment, and a high quality of life for the employees. It is also a city with no corporate income taxes on domestic banks and is rated at investment grade AA-.

The bank can thus leverage the UAE’s or Abu Dhabi’s location-specific advantages to enhance its efficiency and strategic benefits. However, it is wise not to grossly exaggerate these benefits in relation to Lebanon. Though the business climate in Lebanon leaves a lot to be desired, its monetary and financial regulation and compliance is considered world class. And, in the final analysis, the UAE is still in the same “neighborhood” as Lebanon, with a fairly notable degree of direct correlation in economic shocks – and perhaps political shocks – between the two countries.

[pullquote]Though the business climate in Lebanon leaves a lot to be desired, its monetary and financial regulation and compliance is considered world class[/pullquote]

Although the internal drivers do not seem to strongly support Bank Audi’s relocation to Abu Dhabi, it is the external factors that could carry more weight in supporting that decision – factors that have gained more prominence with the globalization and opening of the world economy. This means that corporate HQ should give higher priority to managing its interface with external stakeholders, primarily with financial markets and foreign shareholders. And with the rapid developments in information and communication technologies (ICT) making it naturally easy for HQ to be mobile, such mobility is increasingly towards places where these salient and beneficial relationships with external stakeholders can be optimized, and the three expected gains – efficiency, strategic, and symbolic – can be adequately reaped.

For Bank Audi in AA- rated Abu Dhabi, the bottom line is that the bank will shed the disadvantage of being Lebanese with its associated negative and risky perceptions when dealing with international markets. This would translate to more efficient communication with institutional shareholders and analysts and, more importantly, facilitate better access and quality of financial services, in terms of wholesale loans, bond issues and capital infusion. Add to that the strategic and symbolic gains that arise from operating in a growing financial center that is also loaded with a pool of specialized talent; and from being no longer constrained by local norms and markets, but instead becoming a recognized player in regional or global financial markets.

Equally important is the external driver that deals with the composition and concentration of shareholders. Shareholders that are more international and dispersed are not strongly tied to local HQs in the way that domestic and family shareholders are. As a result, one expects that the higher the share of foreign shareholders and the less concentrated the ownership, the greater the chance of HQ moving abroad is. A look at the composition of major owners of Bank Audi could potentially confirm that: 6.9 percent is owned directly by the Audi family (Lebanon); 5.94 percent by Sheikha Suad Al Homaiz (Kuwait); 4.97 percent by Sheikh Dhiab Al Nehyan (Abu Dhabi, UAE); 4.71 percent by Al Sabah family (Kuwait); 2.55 percent by Al Hobayb family (Saudi Arabia); 2.5 percent by the International Finance Corporation (World Bank); and 29.1 percent by Deutsche Bank Trust Company Americas (as a custodian for all GDR holders).

There is, however, one external driver that might not support Bank Audi’s relocation to Abu Dhabi. Becoming a regional player with fluid access to regional and international financial markets and with a rising share of foreign ownership also involves dealing with international customers and competitors. Under ideal conditions, this should act as an opportunity for the bank to enlarge its customer base and to improve its product offerings. But in Bank Audi’s case that is going to be more of a challenge. The bank has practically no footing in the country, and it is fair to assume that competition is going to be very tough in a banking market with very big players and close to $675 billion in assets.

Although this external factor might impede Bank Audi’s move, there are at least two external stimuli that could expedite the relocation. First, a merger or acquisition by a UAE bank that would have the added benefit of giving Bank Audi or the new merged entity the crucial established presence in the UAE. Second, a threat in the home country driven by concerns over the regulatory regime, the best example of which is a flare up between the US authorities and the Lebanese banking system in relation to compliance with HIFPA, the law concerning Hezbollah.

On balance, then, our preliminary analysis has shown that external drivers mostly favor Bank Audi’s move to Abu Dhabi, whereas the internal drivers do not. The interesting thing is that there is increasing evidence from around the world that external drivers are more important in determining corporate HQ relocation than internal ones, which does not bode well for Lebanon. Besides the damage to its national financial pride, with Bank Audi’s decision to relocate, the country would stand to lose – as far as its banking sector is concerned – from forgone employment, corporate taxes, profit repatriation, financial innovation and dynamism, and market competition.

[pullquote]On balance, then, our preliminary analysis has shown that external drivers mostly favor Bank Audi’s move to Abu Dhabi, whereas the internal drivers do not[/pullquote]

How can we prevent this from happening? We suggest, tentatively, two possible ways out that are not mutually exclusive. One puts the onus on Bank Audi and the other on the government. It is reasonable to argue, given Bank Audi’s difficulty in realizing its first-best strategy of moving its corporate HQ to the UAE because of the extra-tough competition in the commercial banking market, that the bank pursues a second-best strategy of relocating its business units HQ, especially those of its non-traditional banking services that are currently dormant in Lebanon.

The two business units that could be prime candidates for such HQ relocation are private and investment banking, since moving these units seems to agree the most with the bank’s long-term financial interests. To elaborate, private banking HQ could relocate to Abu Dhabi to take advantage of the millions of high net worth individuals in the Gulf which has become a very fertile region for wealth management services; while investment banking HQ could move to Jeddah, the commercial center of the biggest economy in the Arab world that will be undergoing major financial and real sector reforms under the New Vision 2030 outlined by the second crown prince, Mohammad bin Salman. Such moves would naturally benefit from the synergies across products and countries that the bank can derive from its operations in the region and beyond; and they are undoubtedly feasible given developments in ICT that makes it easier for corporate HQ and business units HQ to exist in separate localities.

As for what the Lebanese government can do to incentivize Bank Audi to retain its headquarters in Beirut, there is really no shortage of proposals to put the country back on track and transform it to a viable host for business. This requires a set of reforms and initiatives such as: public private partnerships, infrastructure development, oil and gas exploration, public sector reorganization, and improvements to doing business and the investment climate. These structural changes will not only provide a sustainable lift to the economy, but they will also create a promising environment for banks to prosper and keep their HQ in the country, and even invite new HQs to settle here.

Philip Karam is senior undergraduate business student at the John Molson School of Business at Concordia University, Montreal, Canada.