Top 100 Arab Banks: FAB dominates in a transitional year

Change is the dominant theme in The Banker’s 2018 Top 100 Arab Banks ranking. As markets in the Middle East and north Africa adjust to new economic realities, the region’s financial institutions are also experiencing something of a shake-up. First, a wave of consolidation is sweeping across a number of jurisdictions including Saudi Arabia and the United Arab Emirates. Second, the old vanguard of most profitable markets and their constituent lenders, predominantly among the Gulf Co-operation Council (GCC) countries, is being challenged by higher growth economies and banks in north Africa and the Levant.

These two trends are, to varying degrees, reflected in the outcome of the 2018 ranking. Scooping the top spot this year, for example, is First Abu Dhabi Bank (FAB), which is a product of the merger between the National Bank of Abu Dhabi and First Gulf Bank. This is the first time in the history of The Banker’s Top 100 Arab Banks ranking that an Emirati lender has reached the number one spot. This follows several years of dominance by Saudi Arabia’s National Commercial Bank and, in more recent times, Qatar National Bank (QNB).

Mergers on the horizon

FAB’s top spot heralds the bank’s emergence as a genuine regional champion. Nevertheless, with $20.5bn in Tier 1 capital it remains within reach of QNB with $20.1bn, and as a result the battle for the top spot may heat up in the coming years. Following FAB’s formation, more bank mergers in the GCC are expected. For now, a number of discussions are under way for intra-country deals, including one between Saudi Arabia’s Alawwal Bank and Saudi British Bank (SABB), as well as cross-border mergers such as the potential amalgamation of Kuwait Finance House and Bahrain’s Ahli United Bank.

Given that some of the GCC’s key markets are overbanked, and in light of current operating conditions, these deals have been widely welcomed. FAB’s performance in the ranking highlights some of the gains to be made: the bank recorded a return on capital (ROC) of 14.97% in 2017, well above the 12.25% registered by the National Bank of Abu Dhabi in 2016. This figure puts the bank’s ROC firmly above the UAE’s average of 13.2%. It similarly outperformed the national average in terms of return on assets (ROA), with 1.69% against 1.64%.

The other notable change among the top 10 lenders is the entry of the National Bank of Kuwait (NBK). Coming in 10th, from 12th position in the 2017 ranking, NBK saw its Tier 1 capital hit $8.7bn. This was a substantial 10% increase on the $7.9bn it registered in the previous ranking. Indeed, NBK posted strong figures across the board: assets grew by 11.1%, while profits were also up, by 11.8%. As the dominant player in Kuwait’s banking sector, NBK’s performance reflects in part the relative health of the economy as the government pursues a vast investment and diversification strategy.

Beyond these two changes, the remainder of the top 10 has remained somewhat stable year on year. Saudi Arabia’s National Commercial Bank and Al Rajhi Bank drop one place each as a result of FAB’s arrival, coming third and fourth, respectively. Emirates NBD falls by one place for the same reason to take fifth place. Samba Financial Group, Riyad Bank and SABB have held their positions at sixth, seventh and ninth, respectively.

The big hitting banks’ stability in terms of their Tier 1 capital positions has been accompanied by steady performance with respect to their ROC. Emirates NBD managed to increase its ROC to 16.4% in the current ranking, up from 15.4% in the 2017 ranking. Al Rajhi Bank managed a similar feat by increasing its ROC to 16.3% from 15.6% over the review period. QNB registered the only notable decline, seeing ROC fall from 21.2% to 19.2%, though an accompanying 16.5% growth in its Tier 1 capital may go some way to explaining this.

Asset growth slows

Beyond the 10 biggest banks, the 2018 ranking’s aggregates table provides a good snapshot of a regional banking sector in a state of transition. Asset growth across the Middle East and north Africa has slowed, albeit marginally, from the previous ranking, slipping from 4.95% to 4.8%. Total assets now stand at $2.8bn. Meanwhile, aggregate ROA has also dipped from 1.67% to 1.65%. This was accompanied by a fall in banks’ ROC, which was 13.8% in the current ranking, down from 14.3% in 2017. It should be noted, however, that over the same period Arab lenders posted an impressive 11.5% increase to their Tier 1 capital positions.

These numbers suggest that the regional banking system is as secure as ever, and even if some profitability metrics are starting to cool they remain strong relative to global norms. But a closer look at country-level data reveals some interesting trends. On the whole, a number of markets witnessed small declines to their profitability over the review period. Qatar, for instance, saw its ROA and ROC hit 1.54% and 14.3%, respectively, in the current ranking. This was down from 1.59% and 15.2% in the previous ranking. In Bahrain it was a similar story: ROA and ROC were down to 1.29% and 10.29%, respectively, in the latest ranking, after hitting 1.34% and 10.64% in the previous ranking.

In other markets, however, profitability has soared over the review period. Tunisia is a case in point. With an aggregate ROA of 2.15% and an ROC of 19.87%, the country’s lenders easily outperformed the respective regional averages of 1.65% and 13.89%. Though it should be noted that while Tunisian banks’ capital adequacy ratio was slightly lower than the regional norm – 10.84% against 11.89% – it nevertheless points to an outstanding performance by the country’s lenders over the review period. The only other markets to achieve an aggregate ROA of 2% or higher were Saudi Arabia and Egypt.

Morocco stays up

Morocco was another strong performer in the profitability stakes. The country’s banks registered an ROC of 18.15%, improving on the 17.33% recorded in the previous ranking. In terms of ROA, Moroccan lenders performed less well, maintaining the year-on-year figure of 1.49%. This is partially explained by the fact that Morocco’s banking sector registered a 16% growth in total assets over the review period, easily beating the regional average of 4.8% and becoming the only jurisdiction in the ranking to record double-digit growth by this metric.

Meanwhile, Jordanian banks kept both their ROA and ROC steady at 1.8% and 16.67%, respectively, in the current ranking, from 1.86% and 16.31% in the previous edition. In doing so, the country’s banks easily outperformed the regional average.

These outcomes are mirrored in the Top 20 banks by pre-tax profit with a return on capital above 15% table. The five best performing lenders in this table all come from north Africa and include institutions from Morocco, Egypt and Tunisia. Taking the top spot is Egypt’s QNB Alahli Bank, with pre-tax profit growth of 34% and ROC of 36%. This performance shows that the decision by some Gulf lenders – in this case, Qatar’s QNB – to buy into larger, higher growth markets is paying dividends.

In second place is another Egyptian lender, Commercial International Bank (CIB). As the country’s largest private lender, CIB has been at the forefront of Egypt’s digital banking revolution in recent years. In common with other Egyptian banks, it has played a sizable role in supporting the government’s investment and diversification programme. CIB’s approach has clearly delivered results. The bank’s pre-tax profits grew by 30% in the 2018 ranking while its return on capital was 37.7%.

Another Egyptian lender, Arab African International Bank, also features in this table, in 19th place. The prevalence of Egyptian banks points to the country’s strong fundamentals, including a growing and underbanked population, as well as the economic reforms pursued by the government.

Meanwhile, two Moroccan lenders feature in the top five of the table. Société Générale Morocco, which takes third place, registered pre-tax profit growth of 26.1% and ROC of 15.14%. Attijariwafa Bank, which comes in fifth, saw pre-tax profits increase by 20.2% and ROC surge by 26.74%. Between these two lenders is Tunisia’s Banque Nationale Agricole, which registered ROC of 19.8% and pre-tax profit growth of 23.9%. This is the second ranking in a row that has featured the Tunisian lender in the top five of this table.

Lebanon endures

Outside the top five banks in this table, another Moroccan lender, BMCE Bank Group, comes in at 14th with pre-tax profit growth of 4.97% and an ROC of 18.2%. Lebanese lenders also maintain their strong showing from the previous ranking, with four of the country’s banks making the cut this year. These include IBL Bank in sixth place, Bank of Beirut in 15th, Bank Audi (17th) and Blom Bank (20th). That Lebanon’s banks are able to keep up a solid presence in the table is testament to the sophistication of the country’s financial sector, which has been enduring sluggish domestic growth, regional conflict and a refugee crisis for a number of years.

Seven banks from the GCC make the table, but this is the first time that a lender from the bloc does not feature in the top five since the 2016 ranking. Leading the charge in seventh place is the UAE’s Emirates NBD, which saw pre-tax profits jump by 14.4% and an ROC at 16.4%. Saudi Arabia’s Al Rajhi Bank comes in at eighth with pre-tax profits growth of 12.2% and an ROC of 16.3%. This represents the second year in a row in which Al Rajhi Bank has made the table. It comes as the Islamic bank undergoes a strategic transformation and emerges as one of the strongest performing banks across the region in recent times.

Other lenders from the GCC include Dubai Islamic Bank and Masraf Al Rayan, two sharia-compliant banks that have reached ninth and 18th places, respectively. Saudi Arabia’s National Commercial Bank, which in 2014 pledged to become fully sharia compliant, comes in at 11th, while Bahrain’s Ahli United Bank is close behind in 12th spot. Qatar National Bank is 13th in the table. While this is by no means a poor showing from GCC banks, it does point to the relatively stronger performance of other markets in the current economic climate.

Promising intersection

Notably, many of the banks that feature in the top 20 by growth in pre-tax profits and with ROC of above 15% also make an appearance in the top 10 lenders by total asset growth. This indicates that soaring profitability is being accompanied by significant growth opportunities in markets that are expanding at a steady rate. For example, Morocco’s Attijariwafa Bank, Egypt’s QNB Alahli Bank, Arab African International Bank and Dubai Islamic Bank come third, fourth, fifth and sixth, respectively, in terms of their asset growth. Morocco’s Credit Agricole du Maroc also makes an appearance in ninth place.

Encouragingly for some lenders, there is also a degree of intersection between the top 10 institutions by asset growth and the top 10 by ROA. Egypt’s QNB Al Ahli Bank and Arab African International Bank, for example, registered ROAs of 3.3% and 2.81%, respectively. This positions them at numbers two and three, respectively, in the top 10 in the table.

Three Saudi lenders – Al Rajhi Bank, National Commercial Bank and Samba Financial Group – all make the top 10 by ROA in the ranking. This is a significant improvement on the previous ranking, when just one Saudi lender made the cut.

Given that these institutions are mostly focused on the domestic market, their appearance once again demonstrates that the Saudi reform programme, under the auspices of Vision 2030, is starting to bear fruit. Among other things, this programme includes a massive home construction drive, the privatisation of state assets and huge investments in specific sectors from energy to transport.

Keeping costs down

Meanwhile, beyond the big growth stories, lenders from across the region have also been working hard to push down their costs. The top 10 banks by cost-to-income ratio (CIR) once again suggest a strong culture of cost management among leading jurisdictions. Three Qatari banks make the cut this year, all of which are sharia compliant. Masraf Al Rayan takes third position, with a CIR of 20.48%, while Qatar Islamic Bank comes in at eighth and a CIR of 24.38%, with Qatar International Islamic Bank close behind in ninth with 24.93%. The UAE’s Invest Bank is seventh in the table this year with a CIR of 23.71%, while IDL Bank in Lebanon rounds out the top 10 with 25.29%.

But it is the performance of Egypt’s banks that steal the CIR ratio show, with a total of five banks making the cut. Arab African International Bank leads the way with CIR of 15.08%, while Afreximbank comes in at number two with 17.34%. Commercial International Bank, QNB Alahli Bank and the National Bank of Egypt makes fourth, fifth and sixth places, respectively, in the table this year.

The Banker’s 2018 Top 100 Arab Banks ranking clearly showcases a regional banking sector that is transforming in the face of a new economic landscape. Banks in more populous markets such as Egypt and Morocco are emerging as genuine powerhouses as the environments in which they operate begin to liberalise. Further gains can be expected in the coming years as these reform programmes mature and banks begin to leverage new technologies to tap their unbanked domestic markets.

While some Gulf markets struggle, others are showing promise. Saudi Arabian lenders have maintained strong profitability and capitalisation metrics even as the country has been hit by low oil prices. This highlights the slow but steady gains experienced under the country’s reform programme, with the promise of more to come. Nevertheless, consolidation is on the cards for a number of the Gulf region’s leading markets.

More regional champions along the lines of First Abu Dhabi Bank can be expected to emerge. These are exciting, if testing times for Arab banks, and with further changes on the way the current ranking is likely to be the first of a period of market transformation.