Arab 100 1997: Good times hit the Gulf

Arab 100: The Full Rankings

Arab 100: Top 25 by return on assets

Arab 100: Top 25 by return on equity

Arab 100: Top 25 by total assets

Arab 100: Top 25 by net profit

Arab 100: The 25 worst performers

Arab 100: The 25 fastest-growing by increase in capital

For most banks in the Middle East, 1996 was a very good year. In the Gulf region, higher oil prices boosted government finances and accelerated economic growth. Recovery from drought in the Maghreb region and steady progress in reform programmes led to more private investments flowing into Egypt and Morocco.

Furthermore, economic growth in world markets, particularly the US economy, had a positive effect on banks’ investment portfolios. Business confidence in the Middle East in general remains buoyant and 1997 is looking like another good year for the banks.

The Arab 100 table is once again dominated by the strong Saudi banks, with seven of the 12 Saudi banks among the top 12 players in the region. Of the top 100 banks, 62 come from Gulf Cooperation Council (GCC) states, reflecting the relatively more developed nature of their economies. United Arab Emirates (UAE) has the greatest number at 17, ahead of Bahrain with 13 and Saudi Arabia with 12. Apart from the Libyan Arab Foreign Bank, Arab Bank Group from Jordan is the only non-GCC bank in the top 15. Non-GCC countries increased their representation by four, with Egyptian banks, in particular, putting in a strong performance during the year and moving up the table. Arab Banking Corporation just pipped Riyad Bank for the runner-up spot, although there remains very little difference between the top three banks’ levels of capitalization. Generally, with reform programmes in the Levant and Maghreb regions forging ahead and the main GCC states pushing for membership of the WTO, further liberalization of trade barriers within the region is inevitable and should lead to some consolidation among banks.

Sleeping Saudi giant awakes

The highest oil prices since 1990 ensured 1996 was an extremely good year for Saudi Arabia’s economy in contrast to the tight squeeze in previous years. Payment of an estimated $6 billion in arrears to farmers, contractors and suppliers by the government vastly improved liquidity conditions. With many customers opting to reduce their bank borrowings and a lower borrowing requirement from the government sector, most banks witnessed a sharp fall in their loan portfolios and a rise in their deposit balances, which invariably were channelled into government bonds. Nine of the 12 banks recorded improved profits, and the Saudi banks remain strong and well managed.

The leading Arab bank in 1996 was the National Commercial Bank (NCB) with net profit up 30% in the year, capping a remarkable recovery after a restructuring programme initiated in 1993. NCB has quickly eradicated many of its past inefficiencies and is beginning to exploit its inherent strengths, making up for lost ground in the market. Certainly, Capital Intelligence’s visit to it in July of this year confirmed a new dynamism and direction within the bank. NCB is much stronger now than it has been in the past, which can only augur well for the region. Earlier this year NCB’s legal status changed from joint-liability partnership to joint-stock company. Sheikh Khalid bin Mahfouz, who returned as chairman in August 1996, sold an estimated 30% of his shares to relatives and close friends, and this is probably a prelude to a full public listing, but not in the short term. Riyad Bank (3), 28.5% owned by the ministry of finance and the central bank, strengthened its management team during the year. The assertive policies of the bank’s new board (appointed after the government’s trusteeship was lifted in 1995) were very much in evidence in 1996 and major investment in computer systems will enhance its retail franchise. Al-Rajhi Banking & Investment Corporation (5) continues to be the largest and most profitable bank in the world that operates strictly in accordance with Islamic banking principles. Once again, the bank made strong progress in 1996 under the skilful stewardship of Sheikh Abdullah al-Sulaiman bin Abdulaziz al-Rajhi. Saudi American Bank (7), 30% owned by Citibank, continues to be the most efficient and dynamic bank in the kingdom. In fact, Al- Rajhi Bank and Saudi American Bank are the two most profitable banks in the top 100. Following closely behind Saudi American Bank is Saudi British Bank (10), 40% owned by HSBC, and Arab National Bank (11), 40% owned by the Arab Bank Group. Both Al- Bank Al-Saudi Al-Fransi (12), 31% owned by Crédit Agricole Indosuez, and Saudi Hollandi Bank (33), 40% owned by ABN Amro, firmly resolved past problems to emerge stronger by the end of 1996. Saudi Investment Bank (32), very much on a loan expansion drive, quadrupled its share capital in 1996. By the end of 1997, the merger between Saudi Cairo Bank (23) and United Saudi Commercial Bank (25), orchestrated by Prince al-Waleed bin Talal bin Abdulaziz al-Saud, will be completed, and this will catapult the merged bank into the top 15.

Offshore banking in Bahrain

The Bahraini economy experienced another year of sluggish growth in 1996, with core business for the local banks continuing to be consumer and trade-finance related. Bahrain’s offshore banking unit (OBU) sector has adapted remarkably well to changing market conditions, by re-focusing its operations towards investment banking and Islamic financial services. Strong support from big brother, Saudi Arabia, along with Bahrain’s dynamic liberalization policy and close supervision by the well-respected Bahrain Monetary Authority, should ensure Bahrain’s leading role as a financial hub in the region for the foreseeable future.

Reflecting the well-developed nature of the Bahraini banking sector, the Arab 100 includes a diversity of banks ranging from international OBUs and investment banks to local commercial and Islamic banks. The two largest OBUs, Arab Banking Corporation (ABC) and Gulf International Bank (GIB), continue to lead the Bahraini contingent by a considerable margin. Both banks acquired new general managers during the year. ABC (2), whose business has a truly global spread, is owned by the Kuwait finance ministry, the Abu Dhabi Investment Authority and the Central Bank of Libya. In terms of total assets, ABC is the largest bank in the Middle East. A comprehensive review of worldwide operations is being carried out with consultants Arthur Andersen. GIB (14), which specializes in project finance and wholesale banking, is owned 100% by the Gulf Investment Corporation, an organization set up in Kuwait and equally owned by the six Gulf states to promote economic growth and co-operation within the region. Investcorp (21) is Bahrain’s third-largest OBU and one of the world’s most successful investment vehicles, achieving high-profile status particularly after its successful involvement with the Gucci Group. It provides Arab and global investors with selective investment opportunities in well established businesses. In many respects, it is a role model for other investment banks with its clearly focused strategy, adept management and exceptional fund-raising capability in the Gulf. During 1996 Investcorp’s largest investment, Saks Fifth Avenue, was listed on the New York Stock Exchange along with two of its other investments. United Gulf Bank (47) is 95% owned by the Kuwait Investments Projects Company and concentrates on international investments through externally managed and partly leveraged funds. Bahrain’s largest Islamic bank is the Faysal Islamic Bank of Bahrain (56), operating under both an offshore banking licence and a local commercial banking licence, and is 53% owned by the influential Geneva-based Dar Al-Maal Al- Islami Trust, with the rest of its capital held by wealthy Saudi investors. This bank is active internationally, maintaining a significant presence in Pakistan, and has done much to improve the profile of Islamic banking worldwide. Other OBUs in the top 100 include Bahrain International Bank (50) and Bahrain Middle East Bank (64), which are soundly managed and continue to focus on private and investment banking activities.

The largest of Bahrain’s commercial banks is the National Bank of Bahrain (42), which is estimated to have at least a 30% share of the local market and is owned 51% by Bahraini citizens and 49% by the government. The Bank of Bahrain and Kuwait (49) includes various Kuwaiti banks and government entities in its shareholder structure and is the only foreign bank operating with a branch in Kuwait. Although local banks in general recorded higher profits in 1996, the sector remains over-crowded and margins have been under pressure with slow growth in the domestic economy. We are likely to see consolidation in the future.

Bank profits rise in Kuwait

On the back of higher oil prices, the Kuwaiti economy registered strong growth in 1996 with an improvement in the trade balance and budget deficit. Kuwait’s $5.5 billion sovereign loan, taken out in 1991 after the Gulf War, was fully repaid in 1996. The government’s privatization programme continues apace, boosting shares on the stock exchange by over 40% in 1996. The Kuwait Investment Authority, the state’s investment arm, has raised $1.7 billion so far from the sale of 17 state-owned companies, with 26 more companies in the pipeline.

The level of government debt bonds (granted by the government to replace significant bad debts incurred in the 1980s) continued to recede in 1996 with lending activities intensifying and banks generally recording a rise in profits. The nine Kuwait banks listed in the top 100, appear in the top half of the table. The sixth largest bank in the table, National Bank of Kuwait (NBK), remains the emirate’s flagship bank with a market share of about 35%. It is approximately two-thirds owned by leading Kuwaiti business groups, prominent among them being the Al-Kharafi, the Al-Bahar and the Al-Hamad families. During 1996, NBK successfully adopted the lead role in putting together the $1.2 billion loan package for the Equate petrochemical plant, without export credit support. NBK is conservatively managed and has the lowest level of government debt bonds on its books, having avoided most of the problems in the 1980s.

Gulf Bank (20), the second largest Kuwaiti bank, also had a very good year with net profits up 23% on increased lending. The bank’s shares are widely held with the government selling its minor stake earlier in the year. Burgan Bank (22) is the youngest Kuwaiti bank, having started operations in 1977, and is 59% owned by the government of Kuwait although it is in the process of being privatized. It holds a 28% stake in Bahrain Middle East Bank and, although profits improved in 1996, the bank’s internal disputes detracted from its performance. Next comes Alahli Bank of Kuwait (27) which has changed its board and senior management over the past two years and is currently restructuring its fragile balance-sheet. Kuwait Finance House (31), which is 49% government controlled, is the premier Islamic bank in Kuwait and achieved another year of high profitability in 1996. It is the second-largest Islamic bank in the region after Al-Rajhi, with 50% ownership in a joint-venture bank in Turkey. The smallest commercial bank in Kuwait is the Bank of Kuwait and the Middle East (38), which divested its interests in two of its equity investments during the year.

The central bank remains an active proponent of consolidation in the banking sector, given an overbanked and relatively small market, and it has been widely rumoured that the smaller banks would merge. However, nothing firm has developed so far. The two state-controlled, specialized banks, Industrial Bank of Kuwait (43) and Kuwait Real Estate Bank (46), terminated their merger discussions in 1996.

UAE’s overcrowded banking sector

The UAE is regarded as one of the region’s most buoyant economies. The country’s GDP rose by an estimated 9% in 1996 primarily as a result of a 15% increase in the oil sector. The non-oil sector, contributing 64% of GDP, grew by 6%. Dubai’s reputation as a centre of trade and commerce continues to be fostered, with several multinationals and financial institutions establishing offices in the emirate in 1996. UAE banks reported robust levels of profit in 1996 mainly because of substantial increases in domestic credit and customer deposits.

The success of the union of the seven emirates is predicated on the freedom afforded to each emirate to develop its own power centre. However, one consequence of this devolved structure has been the spawning of a large number of banks leading to an overcrowded banking sector. While major investment proposals by the three largest emirates in downstream oil activities and infrastructure should ensure enough business for all banks for the foreseeable future, the need for consolidation in the sector is evident.

There are 17 banks from the UAE represented in the top 100, with four in the top 20. National Bank of Dubai (8) is the leading bank based in the UAE and acts as the Dubai government’s treasury. The bank mainly concentrates on investing in low-risk assets with a small loan portfolio. The ruling family of Dubai is understood to have the largest, though not controlling, stake in the bank. Following closely are the Abu Dhabi Commercial Bank (15) and Emirates Bank International (16), both of which are majority government owned and the pro- ducts of government-sponsored restructuring initiatives in 1985 when ailing banks were merged to create larger, sounder institutions. The National Bank of Abu Dhabi (18) is majority owned by the Abu Dhabi Investment Authority, and is the largest bank in the UAE in terms of total assets. The bank is conservatively managed, being banker to the Abu Dhabi government, which is the richest among the emirates, and holds the bulk of the country’s oil reserves.

Next comes MashreqBank (26) which is 50% owned by the prominent Al-Ghurair family and is the fourth-largest UAE bank in terms of assets. The bank is generally accredited with pioneering the credit card business in the country.

The Arab Bank for Investment and Foreign Trade (41) is a joint-venture between the UAE federal government (42.5%), the Libyan Arab Foreign Bank (42.5%) and Banque Extérieure d’Algérie (15%). It remains the only commercial bank owned by the UAE federal government. Abu Dhabi Investment Company (44) which was the UAE’s first investment company, is owned 97% by the Abu Dhabi Investment Authority, and manages the emirate’s oil wealth. The Commercial Bank of Dubai (48), which is 20% owned by the government of Dubai, is one of the oldest banks and is particularly strong in trade finance.

Qatar is adjudged to be one of the richest states in the Gulf, with earnings from its investments in Qatargas and Rasgas yet to make a full contribution. The first gas exports took place in December 1996. Successful implementation of these significant projects has enhanced Qatar’s international credibility and the state faces few problems borrowing on the international markets.

The catalyst for Qatar’s positive transformation has been the accession to power of Sheikh Hamad bin Khalifa al-Thani. However, in the short term Qatar still faces financing constraints, including high levels of external debt and debt servicing.

The economy recorded strong growth in 1996, with real GDP increasing by about 10% on the back of higher output and heavy investment in the gas and petrochemical sectors. Because of the size of the projects, local banks, with the exception of Qatar National Bank (QNB), have not participated in the financing to any great extent, save for the occasional participation in smaller downstream projects.

Although there are 15 banks operating in Qatar, only four appear in the top Arab 100, with three of the banks placed lower down the rankings. QNB (13), which is 50% owned by the government and very prudently managed, dominates the market with an estimated 48% share of banking assets in 1996. Commercial Bank of Qatar (83), although small in size, is also deemed to be very well managed. Doha Bank (81) lost its general manager in 1996, while Qatar Islamic Bank (93), which has about 10% market share, is still recovering from poor asset quality and is currently going through a restructuring process.

Higher oil prices and increased production accelerated Oman’s economic growth rate in 1996. The country was the first Gulf state to embrace private investment in infrastructure and privatization, and it is at the forefront of a series of major gas development projects. It is estimated that revenue from natural gas, once projects are fully operational, could eventually match earnings from oil. However, Oman still faces a major challenge eliminating its large budget deficit by the end of the decade. The country successfully launched its first Eurobond in 1996 which led to a deepening of external credit opportunities and firmly established Oman in international capital markets.

Seven Omani banks rank in the top 100 but none of them appears in the upper half of the table. Oman is over-banked with seven local commercial banks, 11 foreign banks and five specialist/wholesale banks. There is a clear need for further consolidation within the sector. Strong support emanates from the central bank, clearly demonstrated in the aftermath of the BCCI fiasco.

In general, the sector recorded higher profits in 1996. National Bank of Oman (55) was the first Omani incorporated bank and is the largest. In terms of assets, Bank Muscat Al-Ahli Al-Omani (82) and Oman International Bank (70) rank a close second and third, respectively. Oman Housing Bank (57), set up principally to provide housing loans to Omani nationals, is 61% owned by the government. The two other specialized government banks, Oman Development Bank and Oman Bank for Agriculture and Fisheries, merged during 1997.

Egypt leads north African revival

After the GCC, the most important Arab banking markets are those of north Africa, which account for 29 of this year’s top 100. Egypt leads the way with 14 entries, followed by Tunisia with seven, Morocco with five, Algeria with two and Libya with one. Of the north African banks, the Libyan Arab Foreign Bank (9) is the largest by total capital and is also a major shareholder in the UAE-based Arab Bank for Investment and Foreign Trade (41) and the Bahrain-based Alubaf Arab International Bank.

Foreign investors pumped almost $700 million into Egyptian stocks in 1996 with many multinationals making direct investments. The basis for Egypt’s development has been the debt-forgiveness agreement signed with the Paris Club in 1991, IMF support and responsible monetary and fiscal policies. Further investment will depend on the government’s ability to accelerate its privatization programme whilst containing the escalating level of domestic debt. With S&P upgrading Egypt’s sovereign rating to investment grade earlier this year, there has been no holding back the investment-led growth in the economy. Stock prices have surged by 45% since year-end which follows a 39% rise in 1996.

The four public-sector commercial banks, National Bank of Egypt (19), Banque Misr (30), Banque du Caire (37) and Bank of Alexandria (39), dominate the market, controlling around 57% of total banking assets and about 68% of total deposits. These banks are strong in retail banking and tend to service the public sector companies. The state banks account for about 50% of total credit, although the true quality of their loan portfolios remains suspect. With much talk of privatizing the state banks, a clearer picture of loan quality should soon emerge. The three joint-venture banks, Commercial International Bank (35), Misr International Bank (60) and Egyptian American Bank (61), are the most profitable, attracting the cream of local business and multinational corporates operating in Egypt.

Rain and reforms boost Morocco

The Moroccan privatization programme appears to be the most advanced in the Middle East. Rain in the early part of 1996 ensured the economy enjoyed strong growth, in contrast to the disastrous drought of 1995. Liberal reforms by Bank Al-Maghrib, the Moroccan central bank, such as the lifting of controls on debtors’ and creditors’ interest rates, the lowering of reserve requirements from 25% to 10% and the establishment of a new local interbank foreign exchange market in June 1996, have stimulated growth and competition among banks. The top seven Moroccan banks account for 90% of total banking assets and performed well in 1996. The second-largest north African bank is the Moroccan-based Crédit Populaire du Maroc (17), which is controlled by the government and was originally established to promote the development of small to medium-sized domestic businesses. Banque Marocaine du Commerce Extérieure (28), having been through a high-profile privatization process, is regarded as Morocco’s premier bank for international trade. The bank successfully issued the first north African global depositary receipt (GDR) of $60 million in April 1996, which was four times oversubscribed. Banque Commercial du Maroc (29) continues to generate one of the highest returns in the sector.

Tunisia, which has yet to embrace privatization and structural reform fully, recorded economic growth of about 7% in 1996, following recovery in the agriculture sector. Tunisia’s association agreement with the EU underlines its commitment to link the economy to its major trading partners. The financial system is dominated by the 12 deposit-taking banks which hold a 75% share of total banking assets and a 90% share of deposits. Banks’ asset structures remain relatively illiquid as most assets are tied up in loans, equities and bonds. However, the sector receives strong support from the Central Bank of Tunisia which has taken a leading role in forcing banks to upgrade their operations and continues to underpin confidence in the system. The largest Tunisian bank, Banque Nationale Agricole (34), is majority owned by the state. As its name suggests, its business is orientated towards the extension of credit to the local agricultural sector. Société Tunisienne de Banque (65) has been consolidating its balance-sheet in recent years, while Union Bancaire pour le Commerce et l’Industrie (74) remains one of the more efficient operators.

Lebanon loses lustre

Lebanese economic growth slowed in 1996, partly as a result of Israel’s attack on Lebanon in April 1996, which caused an estimated $500 million in damages and a loss in business confidence. Also, a tighter monetary policy restrained private investment during the year. Despite these problems, Lebanon’s financial sector was successful in attracting much international investment via Eurobond issues. Sustained domestic political stability will be the key to economic progress in the future.There are five Lebanese banks listed in the table, although none of them appears in the top half. The highest-ranked bank is Banque du Liban et d’Outre-Mer (62) with an estimated local market share of 10% and one of the best names in the sector. Next comes Banque Audi (68), which is owned by the Audi family (24%), Bankers Trust (21%) ­ which is the depository bank for GDRs ­ and the prominent Kuwaiti families of Al-Sabah and Al-Homaiz (20% each). Byblos Bank (72) is 64% owned by the Luxembourg-based Byblos Invest Holding, with the Bassil family continuing to be the major shareholders. However, with over 75 commercial banks, some consolidation in the market is inevitable. Gulf investors continue to take stakes in the Lebanese banking sector, as exemplified by Sheikh Khalid bin Mahfouz’s imminent acquisition of Crédit Libanais.

Jordan’s IMF-agreed reform programme continued apace in 1996. Most businesses are seeking to capitalize on the improved spending power of the Iraqi regime now that the oil-for-food deal has finally gone ahead. The thawing of relations with Saudi Arabia also improved the vista, although Jordan’s economic growth depends largely on the peace process and the level of assistance from creditors in respect of the substantial external debt.

The Jordanian banking sector is fragmented and includes over 20 banks and six specialized credit institutions. There are four Jordanian banks represented in the top 100, although only one appears in the top 50.

The Arab Bank Group (4), which was established in 1930, remains one of the strongest banks in the region and one whose operations have a global reach. Arab Bank Group’s founders, the Shoman family, remain influential and occupy the most senior positions in the bank. Rafiq Hariri, the Lebanese prime minister, is also a major shareholder. The bank also holds significant stakes in three other banks which make the top 100. The most prominent stake is its 40% holding in the Saudi-based Arab National Bank (11). The other two banks are Arab Tunisian Bank (85) and Oman Arab Bank (93). Towards the end of 1996 the Jordan National Bank (51) merged with Business Bank, aided by the shared common ownership of the influential Muasher family, whose stake is believed to be around 40%.

Tony Wynne and Anthony Christofides are analysts at Capital Intelligence, a company which analyzes and rates banks in the Middle East. For further information please telephone
+ 357 5 342300.