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Middle EastOctober 1 2013

Top 100 Arab banks ranking, 2013: Clean bill of health

The Arab world has captured the wrong kind of attention in recent years as the Arab Spring uprisings and their aftermath have dominated global headlines. However, despite this turbulent backdrop, the region's banks have managed to continue to perform strongly, with The Banker's Top 100 Arab Banks rankings showing an industry that is well capitalised and well run.
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Top 100 Arab banks ranking, 2013: Clean bill of health

The Banker's Top 100 Arab Banks ranking for 2013 highlights the continued robustness and health of the Middle Eastern banking industry. Aggregate Tier 1 capital grew by 8.86% from $190.8bn at the end of 2011 to $207.7bn at the end of 2012, raising the minimum Tier 1 capital for inclusion in the top 100 substantially from $244.25m to $315m.

Even more impressive is the fact that this jump in Tier 1 capital is purely a reflection of the growth taking place across Arab banks, unlike many of the increases in Western banks which tend to be the result of an urgent need for recapitalisation.

Top 100 Arab banks – share of Tier 1 capital

Good signs

HSBC Bank Oman recorded the largest increase in Tier 1 capital of 106.35% (to $706m) after being formed by a merger of HSBC’s Oman unit and Oman International Bank in June 2012. The average Tier 1 capital in this year’s ranking stands at $2.1bn. In fact, the banks in the Arab world recorded strong growth across all key financial indicators in 2012, with aggregate pre-tax profits growing by 11.02% to $33.5bn and aggregate assets by 10.71% to $1909bn.

Clearly such growth bucks the trend seen in many other parts of the world, but it is worth flagging up that annual growth in Tier 1 capital among Arab banks has almost halved compared to 2011 when it grew by 15.3%. Growth in pre-tax profits has also slowed down, albeit to a lesser extent, compared to the 13% growth it recorded in 2011. 

This is a reflection to some degree of the enormous political and economic upheaval being experienced across the region in light of the Arab Spring uprisings of 2011 and their continued aftermath.

Well capitalised 

However, despite the slowdown in Tier 1 capital growth, Arab banks remain extremely well capitalised when compared with their counterparts in most other regions in the world. Their aggregate capital-to-assets ratio (CAR) – a measure of a bank’s ability to absorb a reasonable amount of loss – stands at 10.35% in this year’s ranking.

To help put this into perspective, this CAR ratio is more than double the 4.45% aggregate of western European banks, according to The Banker’s Top 1000 World Banks ranking for 2013. Indeed, Arab banks are the envy of banks in many parts of the world when judged by this indicator – the 2013 Top 1000 ranking showed that, at 9.83%, the Middle East has the second highest CAR by region, after central Asia at 11.74%.

Furthermore, in stark contrast to their Western counterparts, Arab banks are continuing to grow their balance sheets. Aggregate annual asset growth in this year's ranking rose to 10.71%, compared with 8.36% in last year's, with 16 banks growing their assets by more than 20%, four more than the 12 banks in last year’s ranking.

Gulf banks dominate

To a large degree, the Top 100 Arab Banks ranking is a testament to the continued successful growth of banking sectors across the Gulf, and more specifically, the Saudi Arabian and United Arab Emirates banking markets. With 20 institutions, the UAE has the highest representation of banks in the ranking, followed by Saudi Arabia and Bahrain with 12 each.

Once again, Saudi Arabia and UAE banks occupy most of the top places in the rankings. They account for nine of the top 10 largest banks as ranked by Tier 1 capital, six as measured by assets, and six as measured by pre-tax profits.

While it is the same key players that comprise the top 10 of the overall ranking, there has been slight movement within it, with the Saudi banks having gained the lead this year. The UAE’s Emirates NBD has dropped from third to sixth place, National Bank of Abu Dhabi has moved from fifth to seventh, while Abu Dhabi Commercial Bank has fallen from ninth to 11th place. Meanwhile, Saudi Arabia’s Riyad Bank has climbed from sixth to fifth position and Al Rajhi Bank from seventh to third.

Saudi Arabia’s National Commercial Bank has held on to the top position by Tier 1 capital, which stands at $10.2bn, and Samba Financial Group has retained its position in fourth. National Bank of Kuwait also held its 10th position, growing its Tier 1 capital by 4.62%, from $5.64bn last year to $5.9bn this year.

QNB's strong year

However, Qatar National Bank (QNB) is arguably the standout performer again this year. It has maintained its position as the second largest bank by Tier 1 capital ($8.8bn), as well as its number one position as the most profitable bank in the ranking – generating pre-tax profits of $2.3bn – and the largest by asset size, with assets totalling $100.8bn. QNB grew its assets by an impressive 21.49% when compared to last year's ranking, helped by some sizeable acquisitions and increases in its existing stakes. 

During 2012, the QNB Group extended its regional reach by acquiring stakes in various financial institutions in the Middle East and north Africa region. These included a 49% stake in Libya’s Bank of Commerce & Development, one of the leading private sector banks in the country, as well as increasing its shareholding in Iraq’s Mansour Bank, the Tunisian-Qatari Bank, and the UAE-based Commercial Bank International.

However, it should be noted that 79% of QNB’s assets were based in Qatar at the end of 2012, and the strong growth in the domestic economy (6.2% in 2012) was a key engine of growth in the banks’ assets.

And growth is expected to accelerate in the coming years as the Qatari government continues to push ahead with its large infrastructure investment programmes, with $70bn set to be spent on infrastructure development over the next decade in preparation for the 2022 football World Cup, which the country will host. These sizeable funding requirements have given a shot in the arm to the entire Qatari banking sector. Indeed, QNB serves as a good barometer of the overall health of the Qatari banking sector which recorded the highest aggregate return on assets of all Arab countries (2.19%).

ROA and ROC by country

Big profits

Including QNB, eight banks recorded pre-tax profits of more than $1bn. Of these, three are from Saudi Arabia and two are from the UAE, while the remaining two are the National Bank of Kuwait, which recorded the fifth highest profits of $1.2bn, and the National Bank of Egypt, which posted the eighth largest profits of $1bn. Furthermore, all banks in this year’s ranking posted a profit - an improvement on the previous two years when two banks posted losses in each of the rankings.

More broadly, Arab banks have put their assets to good use. Aggregate return on assets (RoA) increased from 1.69% in last year’s ranking to 1.75% in this year’s. UAE banks are once again well represented in the top 10 table as ranked by RoA, with four institutions, along with two Saudi banks. There are also four Egyptian banks in this table.

It is also worth highlighting that there are five Egyptian banks in the top 10 table as ranked by return on capital (RoC), but their presence is more a reflection of their low capitalisation levels than their success in generating larger returns.

Indeed, the aggregate CAR of Egyptian banks is 6.65% – the lowest aggregate CAR of all countries in the ranking, which explains why they have the highest country aggregate RoC of 32.28%. The most poorly capitalised Egyptian bank is Banque du Caire with a CAR of 4.3% – a figure more reminiscent of European banks today.

Dominated by inefficient state-owned banks, the Egyptian banking sector remains poorly capitalised and is continuing to battle against a rising number of non-performing loans. Moreover, many of its banks are being forced to participate in the financing of the country's fiscal deficit – expected to reach 9.1% of gross domestic product, equivalent to about E£186bn ($26.97bn), during the budget year 2013/14, meaning they are becoming overexposed to Egyptian sovereign risk.  

The most well capitalised banking sector in the Arab world is Tunisia, with an aggregate CAR of 13.54%, followed by Saudi Arabia with 12.7%. 

Keeping costs under control

Despite the strong growth that has taken place across the Arab banking landscape, they have successfully maintained control of their costs – the aggregate cost-to-income ratio (CIR) has fallen from 35.23% to 33.83% in this year’s ranking.

Indeed, Middle Eastern banks perform well in terms of efficiency on a global scale – the Middle East recorded the lowest CIR of all regions in The Banker’s Top 1000 World Banks ranking this year – posting a ratio of 39.03%.   

At 23.39%, Qatar’s banking sector has the lowest CIR of all countries in the Top 100 Arabs ranking. And within this, at 15.17%, QNB has the lowest CIR of all banks in the ranking, an impressive performance given that it is the largest bank by assets and profits, and the second largest by Tier 1 capital in this year’s ranking.

This year’s ranking also sees the arrival of a new country, with the entrance of Algeria’s Banque Nationale d’Algerie, ranked 30th with a Tier 1 capital of $2.18bn. The bank grew its Tier 1 capital by 11.55%, from $1.96bn in last year’s ranking to $2.18bn in this year’s. Its arrival in the ranking can be explained by the fact that Algeria’s banking sector has poor disclosure of financials, meaning it has been hard to track banking results from the country.

Return on capital for top Arab banks, 2002 to 2012

The down side

While it is overall a positive picture, some banking sectors in the Arab world have recorded a poorer performance than in last year’s ranking. For example, there are only three Jordanian banks in this year’s ranking compared with seven last year. These three banks – Arab Bank, Housing Bank for Trade & Finance and Jordan Kuwait Bank – posted a 1.47% contraction in Tier 1 capital and only a marginal 0.76% increase in assets.

Jordan’s banking sector experienced a slowdown in growth in 2012 due to the challenging domestic and regional operating environment in light of the prevailing Arab Spring. The ongoing civil war in neighbouring Syria means that trade financing has been particularly affected and the quality of credit facilities extended to Syrian clients has deteriorated sharply.  

Similarly, the ongoing political upheaval in north Africa is apparent in the large declines posted by both Algeria (a 23% reduction in profits to $466m) and Tunisia (a 23% reduction in profits to $50m). Albeit to a lesser extent, the effects of the Arab Spring are also apparent on Bahrain and Kuwait by reference to their RoA ratios – a respective 1.33% and 1.22%.

Positive outlook

Excluding the adverse impacts of the Arab Spring on certain countries, Arab banks have largely been insulated from the financial woes being felt by most banking sectors across the world. In particular, the Gulf countries have largely escaped the global liquidity crunch because the region has limited dependency on foreign capital for its funding.

Going forward, while pockets of risk will continue to persist in Arab Spring countries, the outlook for the Gulf banking system remains very bright given these countries are underpinned by strong economic fundamentals: high revenue from hydrocarbon exports, positive net foreign asset positions, ongoing systemic support and large-scale government spending on infrastructure. 

In addition to the $70bn being spent on infrastructure in Qatar, Saudi Arabia’s current project expenditure totals $500bn, including large-scale housing construction as well as $22bn of contracts awarded in July 2013 for the Riyadh Metro. Meanwhile, Saudi Arabia’s retail loan growth has been propelled by its fast-growing mortgage loan sector. 

Meanwhile, in Kuwait, corporate lending has accelerated as the government’s $110bn development plan has gathered momentum and the UAE banking sector is enjoying a resurgence on the back of the country's economic recovery.

Therefore, while emerging market banks outside the Gulf Co-operation Council are bracing themselves for tightened global liquidity as the US prepares to taper quantitative easing, the Gulf’s favourable macroeconomic operating environment means its leading banks looks set to continue to flourish.

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