Yet again, Saudi Arabia’s banks dominate The Banker’s Top 100 Arab banks listing but, as Stephen Timewell reports, there is good news across the region.

Arab banks from Oman to Morocco continue to produce record profits year after year and, despite the stock market correction in the Gulf earlier in the year and the recent dip in oil prices, 2006 looks set to be yet another bumper year. Commenting on the biggest banking market, a recent Standard & Poor’s (S&P) report said Saudi Arabian banks had registered record financial performance over the past three years, amid spectacular economic growth.

“For full year 2006, we expect loan growth to remain high, the funding mix to evolve toward longer term funds raised in the international markets, and brokerage fees to remain relatively stable at high levels, despite the severe correction of Saudi stock prices,” S&P said in the report. It believes that these effects should translate into higher profits for Saudi banks in 2006, although the rate of increase is likely to be in single digits.

Higher results ahead

However, Q3 results from leading banks in the Gulf suggest 2006 results could be higher. National Bank of Kuwait (NBK), the largest Kuwaiti bank and the highest-rated bank in the Middle East, posted a record net profit of $657m for the first nine months of 2006, a 22% increase on the previous year. Ibrahim Dabdoub, CEO of NBK, noted: “We expect the economic boom in the region to continue over the medium term and support our ability to deliver outstanding results to shareholders.”

The positive outlook for the banks has been further reinforced by the recent upgrading of the six Gulf Co-operation Council (GCC) states.

In early October, Moody’s Investors Services upgraded the long-term foreign and domestic currency government bond ratings of the six states to reflect the significant strengthening of their public and external finances.

“The marked improvement in the economic fundamentals of the Gulf countries has mainly been caused by the sustained rise in global hydrocarbon prices over the past five years. However, we have also been encouraged by the relatively prudent use of oil export receipts compared with previous oil booms,” said Tristan Cooper of Moody’s.

Smashed records

While the growth in 2006 looks set to continue, the 2005 results shown in The Banker’s Top 100 Arab banks listing smashed previous records by a wide margin. The aggregate Tier 1 capital of the 100 banks from 13 Arab countries grew by a staggering 33.4% in this year’s listing to reach $79.5bn, a big improvement on the 10.7% expansion shown last year. And while aggregate assets grew by a modest 7.8% this year, aggregate pre-tax profits showed extraordinary growth, expanding by a massive 63.0% to reach $19.4bn, up from $11.9bn and $8.8bn in the two respective previous year’s listings.

The huge 63% growth in aggregate profits (based on 2005 results) represents the highest growth of any region in the world, and this expansion is also reflected in the strong improvement in aggregate average return on Tier 1 capital. The latest listing shows an average return of 24.4% for the Top 100 Arab banks compared with 19.2% in last year’s listing.

Saudi banks dominate

As in previous years, the GCC banks are prominent in the Top 100 listing, with Saudi Arabia dominating not only the six GCC states but also the entire listing. Demonstrating yet again the increasing financial clout of the 54 GCC banks in the listing, the Gulf banks account not only for 76.8% of aggregate Tier 1 capital, up from 72.5% last year, but also a whopping 83.3% of aggregate pre-tax profits, amounting to a total of $16.1bn, and ahead of last year’s 81% of profits.

The 10 Saudi banks again provide the largest block in terms of size and profits, accounting for an expanding 30.5% of aggregate capital and an enormous 37.2% ($7.2bn) slice of aggregate profits of the Top 100. Saudi banks account for well over a third of all Arab bank profits and, with assets of $193bn, also account for more than a quarter (25.2%) of aggregate Arab assets.

Although no Arab country can match the Saudi performance, the United Arab Emirates (UAE) provides the largest grouping of 18 banks in the listing along with a significant share of overall capital and profits. The UAE banks, spurred by strong financial growth in 2005, especially in Dubai, account for 21.7% of aggregate capital, up from 17.9% last year, and also a major share of total profits (21.4%) at $4.2bn, well up on 16.4% last year.

Kuwait’s contribution

It is no surprise that the overall increase in Arab profits came largely from the Saudi banks (60% up) and the UAE banks (115% up) but the six Kuwait banks, which accounted for a growing 10.6% of overall profits (at $2bn), made a valuable contribution along with the smaller Gulf states.

Outside the Gulf, Egypt with 13 banks, Lebanon (10), Jordan (seven) and Tunisia (seven) are the major players. However, although Egypt and Lebanon account for almost a quarter of the Top 100 banks and more than 10% of capital, their combined share of profits is quite low at only 5.7% of the total ($1.1bn). The largest Lebanese banks, Blom Bank and Audi Saradar Group, however, are expanding abroad with cross-border acquisitions, particularly in Egypt.

The 14 Maghreb banks, comprising the banks of Algeria (two), Morocco (five) and Tunisia (seven), may be expanding – with Algeria embarking on a bank privatisation programme – but they remain relatively small, accounting together for 6.5% of capital and just 4.5% ($895m) of profits.

As in previous years, Saudi Arabia’s National Commercial Bank heads the listing, but this year Riyad-based Al Rajhi Bank has jumped ahead of Samba Financial into second place. Riyad Bank moves into fourth place ahead of Jordan’s Arab Bank in fifth – the only bank in the Top 20 Arab banks from outside the Gulf.

Optimistic prospects

Looking ahead, the prospects for banks in the region continue to grow as almost all the GCC states develop new financial operations, such as the Dubai International Financial Centre and the Qatar Financial Centre, which are attracting top global banks and raising banking standards in the region. With Bahrain’s financial centre expanding and new structures planned for Saudi Arabia and Kuwait, fresh opportunities for banks in the region are opening up, especially in the investment banking, project finance and wealth management areas.

The financial outlook for banks is reinforced by positive economic trends. Mohsin Khan, IMF director, Middle East and central Asia department, notes in the latest IMF Middle East Regional Economic Outlook: “Growth in the region continues to outpace global growth and should average 6%-7% in 2006 and 2007 – similar to the rates of the past three years. Strong external inflows resulting from high oil and non-oil commodity prices, foreign investments and remittances are fuelling credit growth, and inflation continues to edge up, though it remains moderate in most countries. The region’s fiscal and external surpluses are still rising, but at a slower pace than in recent years. Progress in reducing debt and building official reserves has put the region in a better position to absorb shocks and address development needs.”

In short, Arab banks, along with others, are well placed to take advantage of the huge opportunities in the region, particularly the Gulf. Record profits are here to stay.

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