The beneficial effects on regional domestic economies of a higher oil price from the middle of last year onwards meant that Arab banks generally enjoyed a steady 1999.
| Bahrain: Gulf International Bank, like Arab Banking Corp, is expanding in the region | ||||||
However, it is in the results for this year that the full effects of the oil price rise will be reflected and the many positive First-half 2000 bank Figures already are showing the trend.
Most Arab countries will have good rates of growth in GDP this year, particularly within the Gulf Co-operation Council (GCC) region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE). The GCC states provide 61 of the top 100 Arab banks. And the top 20 banks ranked on capital are largely from Saudi Arabia, the UAE and Bahrain. The largest 20 represent 52% of the combined asset base but 58% of consolidated net profit. Many of the Arab banking systems remain fragmented with a large number of smaller players. Even the biggest Arab banks are small by international standards.
Arab Banking Corporation (ABC), headquartered in Bahrain, is the largest of the Arab banks.
Bottom-line results were much improved in 1999, net income tripling due to a large reduction in loan-loss provisioning compared with a difficult 1998 caused by exposure to emerging markets, particularly in Asia.
However, ABC’s retail operations continue to produce lacklustre results. From its incorporation in 1980, ABC until recently adhered to a central strategy of diversification but now that strategy centres on international Financial activities related to the Arab world. Management is focusing on return on assets rather than asset growth and redressing the low profitability performance of the past several years which resulted both from asset- quality problems and the difficulties of effectively managing its far-Flung and disparate group of businesses.
Gulf International Bank (GIB), also based in Bahrain, moved up nine notches in 1999 to rank eighth largest after its acquisition of Saudi International Bank (SIB), a small London-based investment bank. GIB is a wholesale commercial bank whose primary focus is on the GCC market and the associated trade and Financial Flows between the area and the rest of the world. It is owned 72.5% by Kuwait-based Gulf Investment Corporation (which is itself equally owned by the six GCC states), 22.2% by the Saudi Arabian Monetary Agency (Sama) and 5.3% by JP Morgan. GIB possesses a strong franchise in the Gulf, partly through its shareholders.
Profitability was down in 1999 but the acquisition brought benefits by way of improved liquidity and more diversified funding. The acquisition expanded GIB’s product range and non-interest earnings – evident in First-half 2000 results – together with approval of a physical presence in Saudi Arabia. GIB was the First bank to receive such approval and follows the decision of the GCC to allow banks from one member state to operate in another. GIB expects to have three Saudi branches over the medium term and plans to open branches in other GCC countries. SIB’s activities were focused on asset management, corporate Finance and capital markets and GIB is now marketing the capabilities in these areas in the GCC.
Saudi Arabia, the biggest and arguably the strongest banking sector in the region, contributes seven of the largest 20 banks.
Saudi American Bank (SAMBA) rose four places in ranking to become the second largest Arab bank and the largest in Saudi Arabia (at the time of writing National Commercial Bank had not released its 1999 accounts). SAMBA’s capital increased by 69% and assets by 54% following the 1999 merger with United Saudi Bank (USB). SAMBA is owned 23% by Citibank (with whom it still operates under a management contract) while some 74% of shares are held by Saudis, the largest stake being controlled by Prince Alwaleed bin Talal, who previously controlled USB. SAMBA’s profitability slumped in 1999 because of a deterioration in loan-asset quality after the merger with USB which also caused increased expenses. USB had a high volume of bad loans (inherited largely from its 1997 merger with Saudi-Cairo Bank) which required additional provisioning. As a result, SAMBA provided a special merger-related provision of SR605 million to cover the portfolio. Mid-year 2000 results reveal a slight fall in the NPL ratio to 9.8% and a small increase in earnings over the corresponding period in 1999. Despite the setback, the medium-term outlook remains encouraging, the bank planning to capitalize on merger benefits such as the establishment of a strong middle-market customer base and increased Financial resources to enable SAMBA to develop into a Middle East banking power.
| The oil price hike has hugely boosted Saudi Arabia, which has seven of the top 20 banks | ||||||
On this note, it has recently established a presence in Beirut; Cairo is likely to be next. Other objectives include expanding its corporate-Finance activities, developing middle-market business and maintaining its dominant position in the credit-card market.
Riyad Bank, Saudi’s third largest bank and ranked fourth overall in the table, continues to strengthen its Financial profile. It has one of the highest capital ratios in the region. Predominantly a retail bank, Riyad’s size and ownership (Sama and the ministry of Finance) make it a major force in the Financing of large government or quasi-government projects. The bank has made much progress over the last few years, new management adopting a more commercial approach.
Al Rajhi Banking and Investment Corporation (sixth-ranked) achieved once again the highest net profit Figure (US$412m) among all Arab banks, generating ROA of 3.6%. Al Rajhi is the only Saudi bank operating exclusively on Islamic principles, giving it a strong position in certain markets. Operations are notable for their simplicity and tend to concentrate on international trade, there being recent expansion into such areas as leasing, project Finance and instalment sales.
Al Rajhi has the largest branch network (362) in Saudi and has engendered strong customer loyalty. The bank’s strategy is to gather non-interest-bearing deposits through its branch network and utilize the funds in Sharia-approved investments. It has a virtual monopoly on Islamic Financing business in Saudi, despite increasing competition as virtually all banks now oVer Islamic products.
Kuwait’s premier institution and seventh in the Arab 100 ranking, National Bank of Kuwait (NBK) had a strong 1999, increasing returns from an already high base; ROE and ROA were 23.4% and 2.5% respectively. It is one of the most reputable banks in the region. NBK plays a commanding role in Kuwait, operating the largest domestic branch network and enjoying a retail-market share of around 40%.
NBK is one of the most internationally oriented of all Gulf banks. Part of its strategy is to maintain its position as a Flagship international bank in the Arab world and expand further its presence in the Lebanese and Egyptian markets. These new markets will allow NBK the growth opportunities in basic banking products that the limited size of the Kuwaiti market no longer supplies. Globalization of world Financial markets and the progressive fall in trade barriers in the GCC mean NBK is keen to begin establishing alliances with strong partners, enabling it to deepen its distribution base. Further expansion in the Arab world is likely if the right opportunity arises.
NBK has been moving away steadily from bulk lending and other traditional banking products. Instead, the emphasis is now on fee-based businesses that have less competition and higher margins, such as asset-management private banking. NBK’s First-half 2000 results were impressive, the bank recording a net profit of KD50.3 million, 12% up from the comparable period of 1999, largely from an improved net interest margin which rose to 3.1%.
The failure of the proposed merger between National Bank of Dubai (ninth) and Emirates Bank International (12th), the two largest banks in the UAE, underlined the difficulty in successfully completing mergers within the domestic market due to divergent shareholder ambitions. The UAE is the most fragmented banking sector in the Gulf region but even mergers between the different emirates will be difficult.
Emirates Bank International (EBI) had a solid year and remains very profitable with ROA of 2.5%. However, EBI’s operating profitability fell by 13% in 1999. This primarily was due to substantially higher public-sector borrowings on which yields are typically low, reduced non-interest earnings (on account of subdued foreign trade activity and poor stock market conditions) and increased operating costs (product development and technology upgrades).
A higher provision charge led to a 19% decline in gross profit.
However, net profit was boosted by significant recoveries of old suspended interest and NPLs.
On a 14% rise in capital, EBI moved up four places in ranking. The bank is a major player in the UAE Financial sector and is widely considered the Flagship bank of Dubai. It is majority-owned by the government of Dubai from whom it receives strong support.
EBI’s vision is to become a leader in the Financial services markets in the UAE and the Middle East region. The bank expects to increase its presence in the region by acquiring small equity participations in Financial entities. It has diversified its business considerably by setting up subsidiaries to handle specialized activities such as credit cards, insurance and investment banking.
EBI also intends to expand its range of products to retain its leading position in the crowded UAE Financial services industry: Twenty local banks and 27 foreign banks serve a population of just 2.7 million. In addition, 34 foreign banks maintain representative offices in Dubai and Abu Dhabi.
Competition is set to increase over the next few years as the UAE opens its Financial markets in line with the WTO agreement. Banks from neighbouring GCC countries are already allowed to open branches (at least in theory) and at least one Saudi bank is reported to be close to setting up a presence in the country.
The UAE banking sector went through a difficult period in 1999, despite a turnaround in GDP. The rate of growth in the oil sector slowed to 3.5%, from 4.7% in 1998, due to lower international trade, particularly weak re-exports, and over-supply conditions in certain domestic markets.
The retail and wholesale trade sectors performed poorly due to weak exports, reduced imports and the continuing depression in the electronics and textiles sectors in Dubai.
Lower spreads and business volumes and higher provisioning led to an overall 4.5% decline in net earnings of UAE banks in 1999.
Darren Stubing is the chief analyst at Capital Intelligence, an international rating agency which analyses and rates banks in the Middle East, North and South Africa, Asia, Central and Eastern Europe, and the Baltics.
For further information, please telephone + 357 5 342 300.
Methodology
The Arab 100 covers the following countries: Bahrain, Egypt, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia and the United Arab Emirates.State corporations and development banks responsible for the general promotion of economic growth are excluded from the tables.
Rankings for 1999 may diVer from those published in last September’s edition of Euromoney as a result of revisions to the Figures.The Arab 100 table was compiled by Elena Antoniou, analyst at Capital Intelligence which analyses and rates banks in the Middle East, North and South Africa, Asia and central and eastern Europe, and the Baltics. For further information, please telephone Capital Intelligence on +357- 5-342300.
Definitions:
Total capital: tier-one capital plus tier-two (supplementary) capital where applicable.
Total assets: as reported in banks’ Financial statements net of contra accounts.
Net profit: net of tax and before dividend distribution or allocation to reserves and minority interests.
