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BANKS IN ARAB countries faced growing domestic competition, continued weakness in global investment markets, tighter margins and higher loan and investment loss provisions in 2002. The top 100 Arab banks' net profits grew by just 0.7% last year on an aggregated basis, following a fall in 2001. Overall return on equity fell to 12.9% in 2002 from 14.1% in 2001.
There were variations in country performance, with most banks in Saudi Arabia, Qatar and Oman performing well while many in Bahrain, Egypt and Tunisia recorded weaker results.
The largest 20 institutions dominate the top 100 Arab banks, constituting a high 56% of the combined capital base, 50% of assets and 61% of consolidated net profit. The aggregated return on equity (ROE) for the top 20 banks, at 14.1%, is higher than the overall sector average, as is their average return on assets (ROA) of 1.5% compared with an average 1.2%. These figures indicate the advantage of size and resources in respect to margin control, a diversified earnings base, and economies of scale.
Arab Bank Group's unmatched diversity
Based on total capital at end 2002, the Arab Bank Group (ABG) of Jordan was the largest bank in the Arab world, with capital of $2.6 billion. Arab Bank was established in 1930 in Jerusalem by Abdel Hameed Shoman, whose vision was to build a banking institution to serve the Arab world. Initially, Arab Bank expanded within Palestine, and later throughout the region. Its principal shareholders include the Shoman family (17%), which effectively has management control, Rafic Al-Hariri (7.1%), and the governments of Kuwait (4.6%) and Saudi Arabia (4.5%). Over the years, Arab Bank has expanded into Europe, North America, the Far East and Australia.
ABG's geographical diversity is unmatched in the region, with 80% of its asset base and earnings outside Jordan. However, its operations regionally are increasingly being undermined by more aggressive domestic and foreign players. ABG's response has been to develop more sophisticated products and services, particularly in investment and corporate banking and, over the past few years, Islamic banking. Its returns were down slightly in 2002, largely because of higher operating costs.
In April 2003, for the first time in over four years, Saudi Arabia's National Commercial Bank (NCB) published its audited financials, including the audited accounts for 1999. The bank discovered a massive SR4 billion ($1.07 billion) of new non-performing loans following the appointment of new management in 1999. This raised its NPL ratio to 22.4% at end 1999 against 9.7% at end 1998. NCB decided to take a SR6.6 billion provision charge in 1999 that led to a loss of SR5.5 billion for the year and a 68% reduction in capital.
Since then, the bank has reduced the level of bad loans by around SR2.2 billion and provided full coverage. NCB has undergone a significant restructuring over the past five years, involving changes in ownership, management and strategy. The kingdom's Public Investment Fund (PIF) acquired a 50% stake in 1999 and a further 29.3% in 2002. At year-end 2002, NCB was ranked second by capital against a ranking of six in 2001 following a 42% rise in capital. Its profit performance was also very good, rising by 27% to $650 million. NCB achieved the highest ROE in 2002, at 27.3%.
Saudi American Bank (Samba) is the third-biggest bank in terms of capital in the Arab world. It recorded the second largest net profit figure ($497 million) for the top 100 Arab banks, even after profits fell by 17% in 2002. This reflected weaker net interest income and a significantly higher provision charge. Samba's bad loan portfolio rose by 20% in 2002 to form 8% of gross loans.
Samba had the second highest ROE among the 100 banks in 2001, at 26.8%, but this fell to 20.9% in 2002, placing it further down the table. Its ROA also fell, but remains high at 2.4%. Samba is aiming to strengthen its middle-market customer base further. The bank also hopes to develop into a Middle East banking power but this is somewhat problematic as Citibank has a strong presence in the region. However, there remains a possibility that Citibank will continue to reduce its stake in Samba.
Al Rajhi Banking & Investment Corporation's net profit fell 8% in 2002 following a 23% decrease in 2001 because of its exposure to Enron. Previously, it had recorded the highest net profit figure in the region, but it is now ranked fourth. Al Rajhi still posts high profitability ratios, with the ROA at 2.4%, although down from 3% in 2001 and 3.9% in 2000.
Al Rajhi is the only Saudi bank operating exclusively on Islamic principles. Its strategy is to gather non-interest-bearing deposits through its branch network and utilize these funds in Shariah-approved investments. The bank used to enjoy a near monopoly on Islamic financing business in Saudi Arabia, but now faces increasing competition since virtually all banks have now begun to offer Islamic products.
Bahrain-based Arab Banking Corporation (ABC), the second largest Arab bank by total assets ($29.3 billion at end 2002), fell to fifth-biggest based on total capital from the number one position at end 2001. ABC had a poor year in 2002, recording a loss of $51 million compared with a net profit of $102 million in 2001. Loan loss provision requirements were significantly higher, amounting to $237 million in 2002 (2001: $128 million). This reflected the bank's corporate risk exposures in North America and Europe, the default by Argentina which also affected the Brazilian economy, the recession in Hong Kong, and loan-loss provisions in Bahrain.
ABC focuses more on the Arab world
ABC's group assets rose by 10% to $29.3 billion in 2002, mainly as a result of the foreign exchange translation impact of the strong euro on the assets of ABC's subsidiaries based in Europe. While loan assets grew by 8% to $15.4 billion, in order to maintain a high level of liquidity, holdings of marketable securities were increased by 26% to $5 billion and placements with other banks by 6% to $6.8 billion. In view of potential regional conflict, ABC put in place measures to counteract any possible effects on operations and liquidity.
