Despite the volatility of the oil markets, it looks likely that Arab banks’ conservative strategies will insulate them from the worst effects of the global downturn. Writer Stephen Timewell.
Volatility is nothing new in the Gulf but the extraordinary changes seen both over the past year and over the past few weeks have given the booming economies and banking sectors some reason to pause. A year ago, oil prices were breaking through the $80 a barrel barrier – blissfully unaware they would almost hit $150 a barrel this past July.
And now in mid-October, amid the world’s greatest financial crisis since the 1930s, oil prices are back down below $75 a barrel and heading towards $50, as fears of deep recession and over supply panic markets. Analysts believe the oil market is caught in a four-way oil tsunami: financial turmoil, economic weakness, great refining capacity and rising oil supply.
So with stock and oil prices gyrating and the recent massive financial bail-outs yet to unfreeze interbank markets, how is the Arab world, and in particular the Gulf states and financial institutions, placed for the future?
In July, a Gulf Finance House economic report forecast a continuing economic boom in the Gulf Co-operation Council (GCC) region, saying: “Oil revenues are expected to cross the $600bn mark annually for 2008 and 2009. Aggregate GCC government expenditure is forecast to reach $300bn for this year, while private sector projects planned and currently under way are valued at about $2bn.”
But what then looked like reasonable forecasts based on reasonable assumptions now seem vastly skewed. The oil price change impacts not only on government spending but also on the financial sector in many ways. But most Middle East players have learnt from past booms and busts and have adopted conservative strategies that can accommodate sudden downturns.
Slight slowdown
While Middle East growth is expected to slow next year as a result of the international market turmoil, George Abed, director for the Middle East and Africa at the Washington-based Institute of International Finance (IIF), believes it will only fall by 0.5% to 0.6%. He endorsed the view for most major countries in the region that accumulated resources and improved economic management would keep growth at relatively high levels.
Speaking during the International Monetary Fund/World Bank annual meetings in October, Mr Abed said he expected the average annual price of oil to drop from $110 a barrel in 2008 to $90 to $95 a barrel in 2009, moving back after a low of $75 to $80 a barrel. He believes this would result both from continuing demand, especially from robust growth in India and China and from Organization of the Petroleum Exporting Countries’ supply management, adding that the Saudis prefer oil at the $90 to $100 price.
While Gulf stock markets were suffering in early October, Mohsin Khan, director of the IMF’s Middle East and central Asia department, is far from downbeat on the GCC economies. He is quoted as saying: “We are revising downwards our growth projections for 2008 and 2009, but we are talking about removing 0.5% from 6% to 5.5%.”
Relatively unconcerned about the impact of falling oil on budgets in the GCC, Mr Khan outlined what he called a break-even oil price at which each government needs to ensure revenue covers expenditure; he noted that the break-even price in Saudi Arabia was $50 a barrel, in the UAE $23 a barrel, $24 a barrel in Qatar and $75 a barrel in Oman.
Positive view
Mr Khan also took a positive view towards the banks, noting: “The banks in the GCC are very strong, and the people behind them have deep pockets.” Emphasising this view, bankers remarked that some Middle East banks in New York were receiving an increased volume of deposits from other banks in mid-October. As one banker explained: “People know banks in the Gulf will not be allowed to go down and so they are confident in placing deposits.”
While a good deal of the global financial landscape has had to be rewritten in recent weeks and many, including several Gulf sovereign wealth funds, have taken heavy hits from investments in mature markets, the financial outlook for the Middle East and its banks is not that bleak.
In relative terms, the Arab banks have not been significantly exposed to the worst aspects of the US subprime crisis and global credit crunch, and have not been badly damaged. Also, those that were hit have had the resources to be recapitalised quickly and get back in action.
As for the oil price, if it settles at about $90 a barrel in 2009, which seems reasonable, that allows plenty of room for the economic and banking boom to continue after the current global crisis is over.
And it is important to remember that current account surpluses in the GCC states are huge and are expected to remain huge. The IIF estimated on October 12 that the current account surplus in the GCC countries would reach $377.4bn in 2008 and is forecast to hit $368.8bn in 2009. The GCC has enough of a financial cushion to overcome any problem.
Different dynamic
In examining the 2008 Top 100 Arab banks listing, it is clear there is a different dynamic driving the performance of banks in the Arab region, particularly in the Gulf, compared with banks in other areas. Reflecting higher oil prices and higher profits in 2007 Arab banks continued to expand and were relatively isolated from the early stages of the global credit crunch in the second half of last year.
The aggregate Tier 1 capital for the Top 100 Arabs in the 2008 listing grew by 19.7% to $124.1bn – slower than the previous year’s growth of 30.3% but well ahead of the average 15.9% growth shown by the Top 1000 World Banks in July.
Arab banks had been broadly booming up until relatively recently when the demise of Lehman Brothers led to a series of cataclysmic global events that even the Arab world and local stock markets could not escape.
Boom conditions
Reflecting the boom conditions, aggregate total assets of the Top 100 jumped 27.3% this year to $1200.9bn and, while this is only 3.2% of the Top 1000 asset aggregate and relatively small, the Arab region is consistently the world’s fastest growing banking region. In addition, aggregate pre-tax profits continued to shine, with annual growth of 6.9% to reach $26.3bn – again, well above that of the Top 1000 World Banks, which slipped 0.7%.
Unsurprisingly, the oil-rich GCC states account for the bulk of the institutions in the Top 100, as well as an increasing share of the aggregates. The six GCC states account for 59 banks in the Top 100 (58 in last year’s listing) with these banks providing $97.4bn or 78.5% of the aggregate Tier 1 total (76.1% last year).
In terms of aggregate pre-tax profits, the six GCC states account for a massive 77.7% of the $26.3bn aggregate Top 100 total. Saudi Arabia accounts for the largest share of the total at 30.7%, followed by the United Arab Emirates (UAE) banks with 19%, Kuwait (14.9%), Qatar (7.3%), Bahrain (3.6%) and Oman (2.2%). Bahrain’s share of the profits in this listing is smaller than usual because of the $758m loss incurred by Gulf International Bank, one of the few Gulf banks to incur losses as a result of US sub-prime exposure.
Saudi Arabia, with the dominant economy, also has the dominant commercial banking sector with its 11 retail banks accounting for 29.1% and 23% of aggregate Tier 1 capital and aggregate total assets, respectively.
With most Saudi banks posting reduced profits in calendar 2007, reflecting the extraordinary profits achieved the previous year, Saudi Arabia’s profits share at 30.7% is less than the previous year’s 38.4% but, nevertheless, the kingdom remains the largest and most profitable (in monetary terms) banking sector in the region by a considerable margin. And Jeddah-based National Commercial Bank remains the largest bank in the listing with Tier 1 capital of $7.9bn, which is big for the Top 100 Arabs but only ranked 109 in the Top 1000.
The UAE, with 17 banks in the Top 100, comes second in terms of aggregates to Saudi Arabia with 20.2% and 20.3% of Tier 1 capital and total assets, respectively, amounting to $25.1bn and $243.8bn. Following the 2007 merger of Emirates International Bank and National Bank of Dubai to form Emirates NBD, the UAE now has the largest bank in the region in asset terms with Emirates NBD topping the assets scale at $69.1bn.
Kuwait’s eight banks in the listing come next with $14.8bn or 11.9% of the aggregate in Tier 1 capital, significantly more than the previous year’s $9.8bn. This was due in part to a major 72.2% capital increase in Kuwait Finance House. Following Kuwait is Bahrain’s 12 banks with combined Tier 1 capital of $11.9bn and then Jordan’s eight banks with aggregate capital of $7.3bn.
While profit growth was slower than the previous year’s aggregate, return on capital was able to stay reasonably high at 21.2%, slightly lower than the previous year’s 23.7% but higher than the Top 1000 aggregate return of 20.0%.
Looking at individual banks, Saudi Arabia’s National Commercial Bank and Al Rajhi Bank, followed by Jordan’s Arab Bank, continue to top the listing but consolidation in the region is having an impact. The merged entity, Emirates NBD, burst in to the upper echelons of the Top 100 in fourth place with Tier 1 capital of $4.8bn. Also, Kuwait Finance House jumped from eighth to sixth following a massive capital boost.
New entrants
Besides Emirates NBD there are five other new entrants to the Top 100, with Bahrain’s Albaraka Banking Group coming in at 28 followed by Kuwait International Bank (59), Bahrain’s Al Salam Bank (70), Tunisia’s Union Bancaire (98) and Libya’s Wahda Bank (99).
Examining the highest movers, the UAE’s Dubai Bank headed this listing, moving up 32 places in the Top 100 to 60th place following a huge 157.4% increase in capital. Lebanon’s Banque Libano-Francaise and Egypt’s National Société Générale Bank both rose 25 places to 58th and 69th place, respectively, after significant capital increases.
Looking at performance, it is interesting to note that of the Top 15 banks based on return on capital, Egypt provides five banks, including the two most profitable. HSBC Bank Egypt and Egypt’s Commercial International Bank top the listing with profit on capital of 57.9% and 51.8%, respectively. Other very profitable banks include Qatar Islamic Bank (38.9%), Bahrain’s United Gulf Bank (38.6%) and Credit Agricole Egypt (37.9%).
As regards return on assets, the Gulf banks dominate, with Bahrain and UAE banks prominent. Bahrain’s United Gulf Bank heads the list with a return on assets of 8.3%, followed by Qatar Islamic Bank (7.8%) and Khaleeji Commercial Bank (7.7%).
In terms of the soundest capital assets ratios, the Gulf banks again dominate this ranking, led by the Bahrain and UAE banks. The three banks with the strongest capital assets ratios are the three Bahrain banks, Khaleeji Commercial Bank, Al Salam Bank and Bahraini Saudi Bank with the high ratios of 49.1%, 31.9% and 26.7%, respectively. These banks are followed by the UAE’s Arab Bank for Investment & Foreign Trade (23.3%) and Saudi Arabia’s Bank Al-Jazira (21.8%).
Reinforcing the growth of Arab banking within the Top 100 Arab banks is the strong expansion of Islamic banking as part of banking in the Arab region. As can be seen in The Banker’s latest Top 500 Islamic Financial Institutions supplement in this issue, Islamic finance is growing strongly across the world with sharia-compliant assets growing 27.6% in this past year to $639.1bn with the bulk of this growth in the Arab world.
Sharia-compliant products
Although there are only three banks in the Top 20 Arab banks that can be described as fully Islamic, Al Rajhi Bank (2), Kuwait Finance House (6) and Dubai Islamic Bank (19), this tends to understate the size and growth of sharia-compliant products. Many in the Gulf , particularly in Saudi Arabia and in the retail sector, are increasingly providing Islamic sharia-compliant products and the ability to provide these types of products at both a retail and wholesale level is attracting new markets.
Islamic finance is not just a passing trend and the growth in sharia-compliant assets in the Arab world and elsewhere, including Asia and London, is providing added strength and stability to the overall Arab banking effort.
