Despite the massive market correction earlier in the year, there is no sign of Gulf banks’ growth abating as they continue to reap the benefits of the region’s oil-fuelled bonanza. 

The six economies of the Gulf Co-operation Council (GCC) are booming on the back of oil prices at $70 plus a barrel and GCC banks have been major beneficiaries, producing record aggregate pre-tax profits and record growth in 2005. The Top 50 GCC banks’ aggregate profits in 2005 rose by a staggering 64% to $15.7bn  from $9.6bn the previous year as oil revenues and stock markets soared, and Gulf financial players took advantage of the huge boost in liquidity and the overall increased level of economic activity.

With such strong growth in fundamentals, the Gulf has become a magnet for foreign institutions trying to get an increased share of the expanding financial pie. And, given the growing domestic focus of both governments and local investors in the post 9/11 period for investing in the GCC rather than abroad, the region is entering a new era of competition and financial sophistication.

Financial centres

A key element of this domestic focus is the creation of new financial centres, such as the Dubai International Financial Centre and the Qatar Financial Centre, which have moved quickly to promote the highest international standards and attract the world’s top players. This, in turn, has not only spurred on Bahrain, the region’s already well-established financial centre, but has motivated both Saudi Arabia and Kuwait to set up new financial centre structures to serve their markets and the region better.

This new financial era involves many political sensitivities – few states will openly admit that they are competing directly against one another – but the financial centres are fighting for regional market share, albeit in differing market segments, and GCC banks are slowly moving beyond their own borders and establishing presences across the region.

The financial landscape of the Gulf is changing dramatically as the centres develop, the local players expand their reach and capability, foreign banks try to muscle in and the huge pool of oil-driven liquidity in the region continues to grow. On top of all that, Islamic banks and Islamic products are having a significant impact, local investors are demanding increasingly sophisticated products and services from a growing band of investment banking houses, and retail investors are discovering that stock markets can go down as well as up.

Banking bonanza

All this has provided a bonanza for GCC banks and the aggregate 64% profit growth in this year’s Top 50 listing makes the GCC the highest profits growth region in the world, well ahead of the overall 18.6% profit growth shown by the world’s Top 1000 banks (The Banker, July 2006, p179). The growth in profits is also reflected in improved profit ratios, which are hitting unprecedented highs.

The latest 2006 listing shows that the Top 50 GCC banks produced an aggregate return on Tier 1 capital of a healthy 26.4%, an improvement on the previous year’s 22.4% and again ahead of the global Top 1000 of 22.7%. The return on total assets of the Top 50 also rose to a record 3.2%, up significantly on the previous year’s 2.4%.

Another important growth component of the GCC banks in the latest listing is the massive aggregate growth in Tier 1 capital. Flush with liquidity, investors have poured funds into the expansion of bank capital with the aggregate Top 50 total rising by a hefty 40.5% to $60.1bn, up from $42.8bn the previous year.

Although this growth is significant, though, the size of the GCC banks is still relatively small. Put in perspective, the aggregate capital of all Top 50 GCC banks is still only the equivalent of France’s Groupe Crédit Agricole – but they are expanding fast.

Rising assets

The Gulf banks’ assets are also on the move and the large profit hikes have been built not only on fees around booming stock markets, but also on an increase of aggregate assets of 22.9% to reach $490.6bn, compared with $399.1bn the previous year. Although some of the increased lending was clearly stock market-related, consumer lending throughout the region is on the rise and strong economic growth guarantees continuing wholesale opportunities, especially in project finance.

Saudi domination

Saudi Arabia’s 10 banks continue to dominate the Top 50, accounting for 39.4%, 38.8% and 43.7% of aggregate Tier I capital, assets and profits respectively. And Saudi banks again provide the top four banks: National Commercial Bank again leads the way after a massive 57.1% capital increase to $5.78bn and a successful 41.9% improvement in profits. The world’s biggest Islamic bank, Al Rajhi Bank, also had a massive 57.8% capital boost in 2005, putting it into second place at $3.56bn, as well as a giant 91.9% increase in profits to $1.5bn, the largest in the region.

The top five Saudi banks, which include Samba Financial, Riyad Bank and Saudi British Bank, together have a combined capital of $17.7bn, which amounts to 75% of the Saudi banking sector.

To add perspective, these five banks together are larger than all the 17 UAE banks in the listing combined and are almost as large as the 23 banks from Bahrain, Kuwait, Oman and Qatar combined. In terms of profits, these big five banks are even more dominant with their $5.34bn in profits in 2005, well in excess of all the UAE banks together and also well in excess of the 23 others combined.

Make no mistake, Saudi banks, and the top five in particular, are the heavyweights of the region.

On the growth front

In terms of growth, several banks in the UAE and Qatar have shown remarkable performances. Abu Dhabi-based First Gulf Bank has again stormed up the listing, rising from 29th to eighth, more than quadrupling its capital to $2.09bn. Abu Dhabi’s Union National Bank has also trebled its capital, moving it into 18th place, and Sharjah Islamic Bank, National Bank of Umm Al-Qaiwain and International Bank of Qatar all more than doubled their capital.

Islamic banks, led by Al Rajhi, Kuwait Finance House and Dubai Islamic Bank, are expanding faster than the market and improving profitability as well. With growing global demand for complex shariah-compliant investment and funding structures, and reports of the $300bn Islamic banking industry growing at 15% in 2005, the Islamic area represents an important expansion opportunity for both specialised and standard banks offering Islamic products.

More of the same?

Looking ahead, can the GCC banks’ record performances continue?

The inevitable corrections in Gulf stock markets took place earlier this year after the euphoria of the 2005 climb. The slide, which affected all markets, with Dubai and Saudi retail investors particularly seeing a lot of red ink, clearly undermined the initial public offering (IPO) markets and may impact more fully on banks in the second half of 2006.

But, despite the corrections causing a slowdown in certain market segments, they are not expected to lead to a bank meltdown. The economic fundamentals remain sound, the oil price is buoyant and the demand for financial products, from retail to investment banking services, remains undiminished.

Despite the market corrections, two key players, Saudi Arabia’s Samba Financial Group and National Bank of Kuwait, recently announced 56.4% and 32% growth respectively in net income for the first six months of 2006, not an indicator of impending doom. Although it is reasonable to predict that banks’ earnings may suffer in the second half as some of the over-enthusiastic lending of 2005 turns sour, this is only seen as a passing phase and the onward march of the GCC banks looks set to continue in 2006 and beyond.

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