|
Reflecting the oil wealth of the Gulf Co-operation Council (GCC) countries, the GCC banks, as in previous years, continue to dominate the top 100 Arab banks. While the GCC was confronted with a severe economic downturn last year due to collapsing oil prices and ripple effects from the Asian and Russian financial crises, the region witnessed a number of positive developments.
In line with the worldwide banking consolidation, two Saudi Arabian banks, the 30% Citibank-owned Saudi American Bank, which appears sixth among Arab banks ranked by total capital, and United Saudi Bank (11), controlled by the high profile Saudi investor Prince Al-Waleed bin Talal, announced a merger in early 1999 which was completed in July.
The new entity, which retains Samba's name and operates under a management contract with Citibank, will rank among the top three banks in the Arab world by total capital and be a force to reckon with, particularly as the GCC opens up its market in the next several years.
It came as a surprise when National Commercial Bank, the largest capitalized bank in the Arab world, made the headlines with the announcement in May that majority owner Sheikh Khalid bin Mahfouz (a former BCCI director), was forced to sell a large stake to the government-controlled Public Investment Fund (PIF). The deal, prompting NCB not to release its 1998 financial statements until mid-year, was orchestrated by the Saudi Arabian Monetary Agency (Sama) which is a strong promoter of transparency and accountability.
PIF is likely to hold NCB's shares until the local stock regains some of its composure, at which time it will sell the shares to the public. Despite the deep recession, the Saudi banks performed strongly in 1998, with most of them reporting healthy profit increases. One exception, however, was the sharp 39% drop in earnings at Arab National Bank (14) as the bank adopted stricter criteria for provisioning for non-performing loans (NPLs) under the leadership of new managing director Nemeh Sabbagh.
Across the causeway in Bahrain, a new giant was formed early in the year with the merger between Gulf International Bank (17) and the UK-based Saudi International Bank. GIB, which mainly focuses on commercial banking activities, identified SIB as a strong candidate to complement its operations, as the latter specializes in asset management and capital market activities.
GIB's consolidated balance sheet as of June 30 1999 showed total assets of $13.3 billion, supported by total capital of $1.1 billion. This places GIB among the top 10 banks by capital in our survey. Through its enhanced capital and ownership, with Sama becoming a 22% shareholder, GIB is in a strong position to penetrate the lucrative Saudi market by offering a diversified range of products and services.
Investcorp (20) remains the leading and uncontested investment house in the region. Despite volatility in the world's capital markets, it continues to reap the benefits of its solid franchise for private equity, asset management and placement ability. It amassed $114 million in income last year, deriving the highest ROA (5.1%) in the survey.
A fever spreads
The merger fever also caught on in the UAE, with the announcement that National Bank of Dubai (8) and Emirates Bank International (16) are discussing a merger. Consolidation in the UAE banking sector has been long overdue and, hopefully, this will set the trend for the years ahead, as the country's financial system is the most fragmented and over-banked in the GCC states.
There are 16 UAE banks, the most numerous in our survey. A merger between NBD and EBI would create the largest bank in the UAE and place it within the top five in the Middle East. The discussions have been under way for sometime but it is not expected that the two institutions will amalgamate their operations for at least another two years.
As with the other GCC countries, the UAE was hard hit by the slump in oil prices but, because of its more diversified economy, the banks' results were relatively unscathed by the recession.
In the Kuwaiti banking sector, merger talks, which have been on and off for most of the last two decades, have not produced any results thus far. Rumours of a merger between Commercial Bank of Kuwait (25) and Burgan Bank (26) surfaced last year but shareholders did not agree on such a move. In the meantime, National Bank of Kuwait (7) dominates the domestic market and remains the best performing commercial bank in the sector, posting a 12.5% rise in net income to $261 million on a slightly reduced asset base. It is understood that NBK is seeking to form a strategic alliance with a strong regional partner, possibly a Saudi bank, which would allow it to penetrate the GCC market more effectively. In the recent past, NBK has also increased its focus on the Levant.
The states of Qatar and Oman together with Bahrain are considered to be the weakest economies in the region, as their oil reserves are dwindling rapidly and prospects of raising oil production diminish.
However, both are investing considerable resources to exploit their huge gas reserves. Qatar, in particular, is well on its way to becoming a major producer of liquefied natural gas (LNG). This is putting strong pressure on government finances over the short to medium term and the country's indebtedness has mushroomed significantly over the last few years.
The long-term prospects for both countries are encouraging, however, as they will benefit from strong flow of LNG revenues in the next millennium. A significant portion (about %) of Qatari banking assets are held by Qatar National Bank (10) which has privileged access to government business because of its close connections with the state, and its high lending limit. In 1998, its profits advanced by 11.5%, generating a ROA of 2.2%.
Omani concerns
During 1998 and into 1999, the Omani banks were affected by tight liquidity and an increasing propensity to tap the interbank market for funds, most of which carry short-dated maturities. Concerned by the trend, the Central Bank of Oman issued a new regulation in January this year, requiring commercial banks to obtain prior approval before "entering into any agreement with any foreign lending agency".
The banks dominating the sector, namely National Bank of Oman (41), Oman International Bank (57), BankMuscat (59) and Commercial Bank of Oman (60), remain very profitable, however, at the expense of running higher than ordinary liquidity risks. The banks' liquidity has become stretched and this concern has led Capital Intelligence to place all the Omani banks' ratings on negative outlook.
Against the depressed state of the GCC economies, Egypt looked a star performer in 1998. GDP grew by a robust 5% last year, inflation is low and the country's reserves exceed $20 billion, providing cover for more than 13 months' import. Despite a decline in tourism and petroleum receipts, the economy has withstood relatively well the aftermath of the November 1997 Luxor massacre and the collapse of world oil prices.
Moreover, with strong prospects for growth in the financial sector, Egypt is attracting unprecedented interest from regional and international banks.
National Bank of Egypt, the country's flagship bank, is ranked ninth in the survey. It has shown signs of revival after the diversification of its business lines to include merchant banking, financial leasing and project finance. Plans are also in place to enter the insurance market and asset securitization.
Meanwhile, there has been a lack of real progress in the privatization of state-owned banks, including Banque Misr (27), Banque du Caire (39) and Bank of Alexandria (43), despite the government's commitment to push through financial sector reforms. The large private sector banks, led by Commercial International Bank (36), continue to be the best performing in the sector and attract the cream of local business and multinational companies operating in the country.
Economic activity in Jordan and Lebanon came to a standstill in 1998, with the continuing deadlock in the Middle East peace process. In both countries, the operating environment has placed some strain on the banks' asset quality, which resulted in higher provisioning. The banks are also building up their loan portfolios in the consumer sector, considered higher risk, owing to a lack of lending opportunities in the stagnant corporate sector.
The Amman-based but trans-national Arab Bank Group maintained its fourth position in the top 100, strengthening its already strong franchise and solid financial position. It is one of the few Arab banks that boasts a truly global presence and expertise. The well managed and reputed Housing Bank () pushed its profits up by 56% last year on the back of a large inflow of dealing investment securities income, a development not likely to be repeated in the future.
Lebanese phenomenon
There has also been some consolidation in the Lebanese banking sector over the last couple of years, a phenomenon long overdue. Byblos Bank (40), the second largest of the Lebanese banks by capital in our survey, acquired Banque Beyrouth pour le Commerce in 1997. Recently, it attempted to merge with Banque Libanaise pour le Commerce. However, negotiations between the two parties broke down in mid-1999 and it is reported that BLC is now in merger talks with another medium sized domestic bank.
Banque Audi (42) also made an acquisition in 1997 when it took over Crédit Commercial du Moyen-Orient. Banque de la Méditérranée (32), effectively controlled by former Prime Minister Rafiq Hariri, is the largest Lebanese bank by capital. Two other Lebanese banks are represented in the top 100, Banque du Liban et d'Outre-Mer (46), which is the largest domestic bank by total assets, and Fransabank (62), which has foreign minority shareholders, including Crédit Agricole Indosuez. The local banking sector is still very much overcrowded but banks are highly profitable because of their substantial holdings of treasury bills on which yields are high. However, in anticipation of declining interest rates, it is expected that earnings of numerous small banks in the country will come under pressure, prompting many to seek alliances with the larger and more established institutions.
In the Maghreb, Tunisia's economic performance continues to win accolades from the IMF and the international community at large. GDP growth reached 5% in 1998 and prospects for 1999 are equally good. This is explained to some extent by exceptional factors such as the diversion of Mediterranean tourism to Tunisia because of the war in the Balkans and also because of security concerns in Turkey.
In contrast to the sound macroeconomic record, the Tunisian banking sector remains weak by regional standards, despite improvements observed over the last few years. This has prompted the central bank, with the help of the World Bank, to promote mergers in the sector, including the relatively inactive eight development banks, by lifting the minimum capital adequacy ratio from 5% to 8% (effective from December 31 1999). Two banks, Union International de Banques and development bank Banque de Tunisie & des Emirats d'Investissement, are already working to consolidate their operations. In July 1999, Société Tunisienne de Banque (83), Banque de Développement Economique de Tunisie and Banque Nationale de Développement Touristique, all having substantial state ownership, approved the merging of their banks. Furthermore, there could be yet another brokered partnership between the newly privatized Banque du Sud (77) and Banque Tuniso-Koweitienne de Développement.
A king's inheritance
Morocco witnessed the death of King Hassan II this summer after a 38-year rule. Although his reign will be remembered for its authoritarian style, toughness and persistence, the king spearheaded Morocco's democratic and economic reforms in recent years, leaving his son, Mohammed, with a sound platform to push these reforms forward. The Moroccan economy returned to growth in 1998, after experiencing a recession in 1997, and most key indicators have improved from the previous year.
Morocco's foreign reserves stood at $5.9 billion in early August 1999, representing seven months of imports. However, huge structural problems remain, including inefficient government, rampant unemployment, staggering indebtedness and wide disparities between the social classes. The Moroccan banking sector is headed by Crédit Populaire du Maroc (21), earmarked to be privatized in the current year. This large co-operative, which controls nearly a third of total banking assets in the country, plays a vital role in financing small and medium sized enterprises and channelling workers' remittances back home. The bank's privatization has been stalled because of disagreements between the finance minister and the privatization minister over which of their ministries would supervise the operation.
Banque Commerciale du Maroc (29) and Banque Marocaine du Commerce Extérieur (30) swapped positions in the survey in 1998 and remain the leading commercial banks in the sector, even though the former has always outperformed the latter historically. Recently, rumours of a merger between these two institutions have been denied. In the meantime, following BMCE's sale of its 20% stake in Crédit Lyonnais' affiliate (61), Wafabank (47), which acquired Banco de Bilbao y Vizcaya's subsidiary Uniban in 1997, has built up a 32% stake in Crédit du Maroc, tentatively forcing the latter to enter into merger discussions. Generally speaking, the Moroccan banks are profitable and well managed but as competition heats up and margins tighten, they must become more innovative and cost conscious in order to prosper.
Syria's sole bank is represented by the Commercial Bank of Syria (28), by far the largest bank in the Arab world in terms of total assets. It recorded a balance sheet of $35.8 billion in 1998.
The only representative from Libya is the Libyan Arab Foreign Bank (18). Andrew Beikos and Elena Antoniou are analysts at Capital Intelligence, an international rating agency which analyzes and rates banks in the Middle East, North and South Africa, Asia and Central and Eastern Europe. For further information, please telephone + 357 5 342 300.
A new beginning for Morocco
Morocco is entering a new period in its history. It has a new king, and a pro-reform government which is pushing ahead with privatization and infrastructure development. These are much needed to re-start growth. Charles Olivier reports
The initial reaction to the death of king Hassan on July 23rd was one of shock and anxiety. Like king Hussein of Jordan, Hassan had been a rock of stability within Morocco: secular, conservative, pragmatic. Under his 38-year rule, the country had avoided the political problems which had plagued neighbours such as Algeria, and had grown into one of the steadiest nations in North Africa.
His 36-year-old son, Mohammed, who was crowned king shortly afterwards, was regarded as a capable replacement, having worked in both the United Nations and the European Commission. But some feared that he might lack the political expertise to hold onto the reins of power.
Over the last month, king Mohammed has eased these fears mainly by restricting his public announcements to uncontroversial remarks about the need for sound management and greater accountability in public life. No political reshuffles have taken place, and the economic reforms begun by his father have continued.
Indeed many now see Mohammed as a force for change rather than a liability. "People hope that he will be able to do things the old king could not such as accelerating democratic reform," says George Joffe, a north Africa specialist at Chatham House (the UK foreign affairs think tank). "It is well known that Mohammed would like to constitutionalize the monarchy - perhaps along Spanish lines - and make its political power less arbitrary."
Investors seem reasonably confident. In the week following the old king's death, the stock market, which had been pretty flat all year, rose by 1%. And most foreign investors are bullish about the future. "I expect the index to rise further during the year," says Dominic Baker, manager of the Framlington Maghreb Fund, one of the largest international investors in Morocco.
However, the next few years are likely to be tough ones. Over the past decade, Morocco has managed to stabilize its economy by cutting government spending. Inflation is down to 2.9% and official reserves have grown. "Morocco has a commendable record of internal and external stability," noted a recent IMF report. But this fiscal rectitude has yet to translate into growth.
Since 1990, non-agricultural GDP has expanded by just 3% a year, not nearly enough to provide jobs for its 30 million people. As a result, unemployment is up to 22% and social unrest, particularly among jobless graduates, is growing. Education and healthcare provision remain poor and the country is running out of water.
Sixteen years after Morocco began to follow the IMF reform programme, industry still only accounts for 33% of GDP, and most of this is concentrated in three sectors: potash mining, oil and gas, and food processing.
Meanwhile, the government has yet to get to grips with its most difficult tasks of restructuring state-owned companies, lifting trade barriers and cutting back the bloated civil service. At least some of these challenges are now being tackled. Earlier this year, the government passed a new privatization law allowing it to sell off a wide range of companies including Itissalat al-Magrhib (IAM), the fixed-line telecom monopoly, ODEP (the ports utility), Royal Air Maroc (the national airline), Somaca (a car assembly plant), Comanav (the shipping group), four sugar companies and six hotels.
First off the block is likely to be Fertima, a fertilizer producer which the government put up for sale in July 1999. Analysts believe it could go for anything up to Dh229 million ($23 million). The big attraction, however, will be IAM which is scheduled for sale in the first quarter of 2000. It will be closely watched.
When Morocco's second mobile telephone licence came up for auction in January 1999, most telecom analysts thought it would go for around $400 million. Five months later, a consortium led by Spain's Telefonica and Portugal Telecom paid $1.1 billion for it. According to Chris Boardman, a corporate financier at NM Rothschild (who arranged the auction), this was the highest amount ever paid for a mobile licence on a national-wealth-adjusted basis.
IAM already owns the only other mobile licence in Morocco and in 1998 made net profits of $130 million So, following the success of the recent mobile phone licence auction, analysts now speculate IAM could fetch over $4 billion. When the government asked for tenders to arrange the sale, no fewer than 15 banks submitted proposals. It was eventually won by Merrill Lynch, Paribas and JP Morgan.
The government is also pressing ahead with a number of infrastructure projects including two combined cycle power stations, two nuclear power stations, ten football stadiums, a 32 kilometre motorway and a $1.03 billion water development programme. Tenders for many of these projects such as the Tangiers water concession have already been launched.
Thanks to the country's strong standing with investors - and the support of the French government which regularly provides credit guarantees for Moroccan bonds and loans - most of these projects stand a good chance of raising the necessary financing.
Bank appetite for Moroccan risk appears to have held up well. In May 1999, Banque Marocaine du Commerce Exterieur (BMCE) managed to secure e160 million of three-year debt in the loan market at Euribor plus 87.5 basis points, remarkably cheap money for an emerging-market borrower.
Morocco's future prosperity relies on its ability to attract foreign investors and the ambitions of its own local private-sector companies. Encouragingly, foreign direct investment has begun to increase. Earlier this year, Ciments Francais, the French owned cement company paid Dh1.1 billion for a stake in the local producer Asmar. In July, Swiss Re bought a 5% stake in Marocaine Vie a local insurer. Meanwhile, seven oil companies including Shell, Enterprise and Lasmo have begun exploration in Morocco's offshore fields.
Local firms have - to date - been rather less adventurous. According to Eric Stoclet, head of Citibank's north African operations, few are expanding at present. "There isn't a lot of investment going on," he says. There are one or two exceptions, however, such as Somepi the Moroccan industrial conglomerate. Last year, Somepi set up a liquid gas bottling plant in Cote d'Ivoire with Italian firm Raga Engineering. In July 1999, it signed a joint venture with the Dutch packaging giant, the Van Leer Group, to set up a metal and plastic packaging plant in Morocco.
If state-owned companies could be encouraged to follow Somepi's example, Morocco might have a bright economic future, particularly after 2010 when all trade barriers to the EU are being lifted. "There are lots of opportunities for cross-border partnerships," says one Casablanca-based banker. "But many companies need to restructure first."
Whether the Moroccan public is ready for this remains to be seen. Earlier this year, workers at IAM staged a week-long demonstration at the state parliament to stop the company being privatized. Convincing them that it is necessary may test the new king's powers of persuasion.
|