This time the Gulf oil boom is different. As oil prices break through the $80 per barrel (p/b) barrier and nudge towards $90 p/b and as the six Gulf Cooperation Council (GCC) states have recorded balance of payments surpluses in excess of $500bn over the past five years, the Gulf has learned the lessons of previous booms. Although huge amounts of money are still channelled abroad into often low-yielding assets, today’s strategy clearly acknowledges the huge investment opportunities at home and the natural desire to seek better returns from investments overseas.
A new energy has arisen in the Gulf region’s economy. As unsurpassed oil surpluses fuel the creation of unparalleled investment and banking opportunities, the experience built up since the booms of the 1970s and 1980s and the strength of regional institutions have created a financial powerhouse.
How Gulf wealth operates both at home and abroad depends on a variety of factors though. One factor is the strength of the banking system. With banks in the Gulf expanding fast, The Banker’s Top 100 Arab Banks listing highlights the dynamism in the GCC (see page 30).
Another factor is the rise of Islamic finance. This month, The Banker launches its Top 500 Islamic Financial Institutions ranking (see supplement), showing the growth of almost 30% in this specialised area. The Gulf is at the centre of a new springboard for growth in financial services in the region, both conventional and Islamic.
As US bulge bracket firms establish themselves in Dubai, Qatar and Riyadh, the era of suitcase bankers winging in and out is ending, and the region is becoming accustomed to strong banking presences on the ground. Dubai, Qatar and Riyadh are determined to establish credible financial centres, as well as Bahrain, so the level of expertise is increasing significantly in the region and this will continue as the Gulf continues to provide oil and copious quantities of liquidity into the financial sector.
Financial hub in the making
Much more than in the past, the Gulf is now becoming a fully serviced financial hub with different centres specialising in different business areas. Qatar is looking to finance the huge projects it needs for the future, for example, while both Bahrain and Dubai are seeking to provide a more varied and eclectic range of products and services. Bahrain is channelling its energies into the Islamic sector, where it has 53 Islamic institutions offering services from insurance to investment banking.
The Dubai International Financial Centre (DIFC) has licensed 482 institutions since it opened in 2005, including Goldman Sachs International and Morgan Stanley. And Riyadh, capital of the biggest market in the region, is also opening up, allowing investment banking firms to establish various related firms and attracting a variety of expertise to the kingdom.
But 2007 is the year when the Gulf has not only asserted itself as a major financial centre, but has also visibly flexed its muscles on the global financial stage. In a series of complex transactions in September, Borse Dubai grabbed 28% of the London Stock Exchange (LSE) and 20% of New York’s Nasdaq while the Qatar Investment Authority took hold of 20% of the LSE and 10% of Sweden’s OMX. This gives Dubai and Qatar jointly almost 50% of the LSE.
Gulf governments, like other governments around the world, are keen to derive more value from their investments and improve on basic US Treasury yields. While institutions such as Abu Dhabi Investment Authority and the Kuwait Investment Authority (KIA) have been making major investments abroad for years, but generally in a low-profile manner, Qatar and Dubai have been willing to go in for some high-profile acquisitions through their sovereign wealth funds.
Qatar has bought a major London property, Chelsea Barracks, this year and has tabled an ambitious $20.6bn offer for UK supermarket chain Sainsbury’s through its investment vehicle Delta Two. Qatar’s assets under management, estimated at less than $50bn, are considerably less than Abu Dhabi Investment Authority’s at $500bn to $1000bn, the Saudi Arabian Monetary Agency’s at $300bn to $400bn and the KIA’s at $250bn.
As much of the world feels the effects of the subprime induced credit squeeze, the massive wealth of the Gulf is beginning to assert itself in various ways and will continue while oil is well above $80 p/b. The bid for Sainsbury’s, the grip on the LSE and Dubai’s acquisition of P&O last year are clear examples of the region’s strengthening financial role and the countries’ intent on playing a smarter game than in the 1970s.
Currency off the peg
Looking ahead, the booming Gulf and the burgeoning assets under management may be benefiting from good oil prices, but the falling dollar is having a negative impact. Earlier this year, Kuwait halted its currency peg to the dollar, having tired of the effective tax placed on it by the dollar. Who will move next?
A revaluation of currencies against the dollar would help temper inflation, the prime economic irritant at present in the region, and Qatar and the UAE may follow Kuwait’s example.
Revaluations of Gulf currencies or moving away from the direct dollar link sends a sharp political message to the US at the beginning of an election year. But, although the Gulf continues to boom on the back of rising oil prices, the Gulf states do not want to see their gains slipping away in a declining dollar.
The world has changed and US policies are no longer so determining of Gulf fortunes. Unlike in previous oil booms, the Gulf states are developing their own capacities and driving more independent policies on investment, oil and asset management.
The Gulf is unlikely to cut its links to the US and the dollar, but it is likely to assert a more independent approach in its own best interests. The Gulf is becoming an important financial hub and, just as the institutions in the region are expanding the Gulf’s role in the global economy, international financial firms are making the Gulf a key global presence.
Arabs buck the trend
Arab banks, unlike many other institutions worldwide that have been hit by the current credit squeeze and possible global economic slowdown, are powering ahead, producing continuing record profits and growth, and benefiting from the ongoing economic boom in the region. With oil prices higher than $80 p/b and not expected to fall significantly in the future, and Gulf financial assets estimated at more than $4000bn, increasingly sophisticated Arab financial institutions are taking full advantage of the regional opportunities now available with further strong growth expected this year as well.
The growing bullishness reflects not just the oil price but also the growing confidence in the expanding capabilities of Arab financial institutions as well as the expansion of Islamic financing (see Top 500 Islamic Financial Institutions supplement). Unlike in the past, when inexperience led to a failure to take advantage of regional opportunities, Arab financial institutions are now taking charge of their own destiny.
Also in other significant developments, Arab banks are beginning to develop regional presences. In the past, banks stuck to their domestic markets; now a number of banks are expanding across borders. Saudi Arabia and the Gulf are opening up, Lebanese banks are expanding into the potentially large Egyptian market and, as elsewhere in the world, consolidation and scale are emerging as key themes.
In Dubai, the prospective merger of Emirates Bank International and National Bank of Dubai (see The Banker, September 2007, p149), which could create the Gulf’s biggest bank in next year’s Top 100, represents a watershed in Arab banking. In a region where mergers have been shunned for various political and cultural reasons, this Dubai merger is expected to herald further much-needed combinations. And in Egypt, the much discussed merger of Commercial International Bank and Arab African International Bank, which come 50th and 81st in our current listing respectively and whose merger could be agreed by year end, is another step in the consolidation trend.
Although Arabs may be performing well, their relative small size does represent a serious challenge in an increasingly globalised market, where the high cost of regulation is a major concern. Arab banks need to be bigger to compete better and more efficiently.
Of note, in asset terms the aggregate assets of the Top 100 Arab banks still only represent half that of Citigroup’s alone.
Top of the ranks
Saudi Arabia’s National Commercial Bank, once again the largest bank in the Top 100 in terms of both Tier 1 capital and assets, reflected the continuing growth trend with strong results for the first nine months of 2007. NCB chairman Sheikh Bahamdan announced net income without capital gains of SR4813m ($1287m), a 15.3% increase on the SR4175 for the same period last year. He said that assets grew by 23.6% to SR192.4bn for the nine months, with customer deposits up 19.8%, shareholders’ equity up 14.7% and return on average equity reaching 25%.
National Bank of Kuwait (NBK), the highest-rated bank in the Middle East, reported a record net profit of $790m during the first nine months of this year, up 16% on last year. It recently acquired a 40% stake in Istanbul-based Turkish Bank and won a bid for Egypt’s Al-Watany Bank, both deals reflecting its growing regional expansion. NBK also had a 20% capital increase approved in late September, allowing further room for growth.
Another key institution, Bahrain’s Gulf International Bank (GIB), reported net interest income of $232.2m for the latest nine months, 23% up on the previous year. GIB, 19th in the Top 100 and a leading merchant bank in the Middle East, particularly the Gulf, has acted as mandated lead arranger in most of the region’s major project finance deals, especially the largest two, which made it into the world’s top 10 list: the $3.6bn Marafiq IWPP in Saudi Arabia and the $2.4bn Messaieed AIPP in Qatar.
GIB chief executive Dr Khaled Al-Fayez says: “We are pleased with our leading market position in the project finance market in the Middle East. The bank has been for many years the region’s primary provider of project and structured finance services.”
As the world’s largest banks flock into Dubai and Qatar in particular to take advantage of the boom in the region, Arab banks are slowly but surely strengthening their role, their capabilities and regional spread. Banks in Saudi Arabia, led by NCB, Al Rajhi Bank and Samba Financial Group, are improving their project finance roles with Saudi banks reported to account for almost 60% of Gulf acquisitions worth $37bn in the first eight months of this year (see Saudi Arabia, page 36).
The development of the new economic cities and new oil and gas-related projects in Saudi Arabia, along with massive projects in Kuwait, Qatar and the UAE, provide huge potential in the coming years, with regional stock markets stabilising after last year’s significant correction, particularly in Saudi Arabia.
Economic expansion
Examining this year’s Top 100, the totals reflect the expansion that is taking place across the Arab region, particularly in the Gulf. Aggregate Tier 1 capital for the Top 100 Arab banks rose 30.3% from the 2006 listing to reach $103.7bn. Although this total only represents 3.1% of the Top 1000 World Banks total Tier 1 in our July listing this year, the growth of the Top 100 is significantly greater, at 30.3%, than the Top 1000, at 18.4%.
Looking at other Top 100 Arab measures, aggregate total assets grew by a strong 23.1% to $943.6bn, while aggregate pre-tax profits expanded by 26.7% to $24.6bn. Both the Arab growth rates were well in excess of the Top 1000 growth rates of 16.3% and 21.9% respectively, and demonstrate the dynamism of the regional banks at this stage.
From where is the critical growth coming? The six GCC states, the oil-rich Gulf, provide the bulk of the banks and the bulk of the capital. The six account for 58 banks in the Top 100, led by the United Arab Emirates (UAE) with 18, which in turn account for the dominant part of the $103.7bn in Tier 1 capital with 76.1% of the total.
Saudi Arabia, with 11 banks in the Top 100, as well as 29.8% of aggregate Tier 1 capital, is the dominant banking country in the listing, with the largest economy. The 11 Saudi banks, led by this year’s Top 100 winner, National Commercial Bank, all feature in the top half of the listing with new bank, Bank AlBilad, entering in 41st place.
As well 29.8% of capital, the 11 Saudi banks account for 23.4% of aggregate assets and a huge 38.4% of aggregate profits of the Top 100, making them the most profitable in the region with $9.4bn.
The UAE, with 18 banks, comes second to Saudi Arabia in terms of aggregates, accounting for 21.1% of Tier 1 capital at $21.9bn, 18.3% of assets at $172.5bn and 17.2% of profits at $4.2bn.
Kuwait’s seven banks in the listing come next with $9.8bn in Tier 1 capital, followed by Bahrain’s 11 banks, which account for $9.2bn in capital, and then Jordan’s eight banks with $6.6bn.
With aggregate return on capital at 23.7%, slightly down on the previous year due to the 30.3% rise in capital, the Arab banks are heading into a further period of expansion, especially in the Gulf, as they realise they need size and scale. Following the merger of Emirate Bank International and National Bank of Dubai this year, other mergers may follow in Abu Dhabi and elsewhere in the Gulf next year.
Little change at the top
Examining individual banks, the Top 10 in the listing remains similar with, again, NCB and Al Rajhi Bank clearly at the top, Arab Bank jumping from fifth to third following a 66.4% capital increase, and Kuwait Finance House moving into eighth from 13th following a 39.8% rise in capital. Dubai Islamic Bank catapulted to 13th from 29th the previous year after a significant 175.9% capital increase.
Although most of the major banks moved up the rankings after significant capital increases, some fell. First Gulf Bank moved down to 14th from eighth after a modest 4.7% rise. And National Bank of Egypt dropped from 23rd to 30th with a 1.3% decline in capital.
An important newcomer this year, after years of non-disclosed figures, is Commercial Bank of Syria, the large state-owned bank, which enters in 20th place and shows a major capital increase of 455.1%.
While Lebanese banks account for nine of the Top 100, led by Audi Saradar Group and Bank Blom, they only account for 4.9% of capital, 6.6% of assets and 2.9% of profits, a weak showing.
Egypt, which provides 11 banks in the listing, does little better than Lebanon, accounting for 4.5% of capital, 10.1% of assets and 3.8% of profits. A largely underbanked market, Egypt nevertheless has strong potential (see page 41).
Islamic banking
Part of the strength of growth in Arab financial services in the Gulf has stemmed from the expansion of Islamic finance. Understanding the impact of this expansion has been difficult without clear statistics but data in our Top 100 and also in the Top 500 Islamic Financial Institutions supplement attached to this issue provide a better picture.
Separating out Asia and Iran from the Top 500 Islamic totals, the growth of Islamic finance has been extremely strong, hitting 36.7% in our latest figures (see supplement) to reach $200.3bn in the Middle East and north Africa (MENA) region, which is dominated by the six Arab states of the GCC.
This 36.7% growth in sharia-compliant assets (SCAs) across the Arab region is likely to be strengthened in the future as Islamic finance becomes more attractive to those in the region and as institutions, particularly in Saudi Arabia, switch to Islamic products from conventional ones.
Looking closely at the GCC states and leaving aside the leading Iranian banks, it is clear that eight of the Top 20 Islamic financial institutions (Al Rajhi Bank, Kuwait Finance House, Dubai Islamic Bank, Abu Dhabi Islamic Bank, National Commercial Bank, Al Baraka Banking Group, Banque Saudi Fransi and Samba Financial Group) are from the six GCC states and all are expanding their SCAs at a significant rate.
The increasing focus on Islamic finance in the Gulf will allow the financial centres there, whether Bahrain, Dubai, Kuwait or Riyadh, to become hubs for the Islamic finance industry and to develop more sophisticated products in accordance with sharia law.
As Islamic bonds (sukuks) and loans grow at a wholesale level as well (see supplement, page 8), the Gulf is likely to become the global centre for Islamic finance and further strengthen its financial credentials.
And looking beyond current political turmoil in the region, bankers are bullish that perhaps, in time, Iran’s economy and large Islamic financial institutions could work together with the GCC to provide not only oil and gas, but also a prime source of liquidity and financial services for the world.
After previous oil price booms in which bloated revenue streams were frittered away and lost in the West, in recent years there has been a refocusing on investing at home rather than abroad. And the smarter attitudes taken by the GCC states in running their governments and financial infrastructures have led to improved, more competent institutions that are capable of making the Gulf a multi-functional financial centre for the 21st century.
