Though 2017's Top 100 Arab Banks ranking shows a slowdown in profitability and growth, the Middle East is doing relatively well. While no longer stellar, the new normal of lower oil prices sees banks enjoying solid performances and improved cost-to-income ratios. James King reports.

The Banker’s Top 100 Arab Banks ranking for 2017 paints a picture of regional resilience, even as a number of aggregate performance metrics have declined. Lower oil prices and rising geopolitical uncertainties have featured among the challenges facing banks across the region in recent times. These difficulties have dragged down profitability and asset growth in some markets, leading to a wider regional slowdown in some growth markers relative to the previous ranking.

Despite this shift, lenders across the Middle East and North Africa have continued to bolster their capital positions and are braced to face future challenges from a position of considerable strength. The region’s Tier 1 capital climbed by 8.1% over the 2016 review period, reaching $311.4bn – up from $282.8bn in last year’s ranking. This growth rate almost matched that of the 2016 ranking, which hit 8.6%.

Arab banks - Share of Tier 1 Capital

Qatar saw the largest increase to its aggregate Tier 1 capital position with growth of 15.7%. Lebanon was a close second with 13.6%, while Jordan registered a 12.9% gain, taking third place in the growth stakes.

Total assets up

The region’s aggregate balance sheet also expanded over the review period, albeit more slowly than in the previous ranking. Total assets hit $2677bn, up by 4.9% from our 2016 ranking. This is a slower than in the previous ranking, when assets climbed by 5.8%, and the ranking before, which saw a 10.5% increase.

Meanwhile, pre-tax profitability growth has continued to slow. In the ranking two years ago, pre-tax profits across the region grew by 13.4%. The following year this number was 4.7%, while in the current ranking it is barely positive at 1.45%. In some markets, collapsing oil prices have led to more careful government expenditure and the withdrawal of public sector deposits. This in turn has contributed to slower-than-usual economic growth and an increase in the cost of funds, both of which may have played a part in denting regional banking profits.

Further signs of pressure can be seen in other performance metrics. The aggregate return on capital for the region’s top 100 lenders is 14.3% in the current ranking. This compares with 15.6% the previous year, despite the two rankings enjoying almost identical aggregate Tier 1 capital growth. And in a further sign of the pressures facing banks in some markets, the aggregate return on assets is 1.67% in the current ranking compared with 1.77% previously.

Acceptable performance

It should be stressed, however, that despite year-on-year falls in profitability and asset growth, banks in the region are performing well relative to global norms. What The Banker’s 2017 Top 100 Arab Banks ranking highlights is the end to the kind of stratospheric achievements of the past decade when oil prices were high. Yet far from crashing back down to earth, regional banks are adjusting to a new normal, in which their performance is moderating but still impressive.

Some markets did particularly well over the current review period. Egyptian banks, for example, recorded the highest aggregate return on assets in the ranking at 2.64%, a slight increase on the 2.62% recorded in the previous ranking. It is also above the regional average of 1.67% for this year’s edition. Egypt’s strength in this metric spotlights the growth opportunities in the market and the fact that the country’s banks are putting their assets to good use.

But it is not all plain sailing for Egyptian lenders. Relative to many of their regional peers, Egyptian banks are undercapitalised. The capital adequacy ratio of the six Egyptian banks featured in the current ranking is just 5.57%, well below the regional average of 11.63%. This fact largely accounts for an aggregate return on capital of 47.3% against the regional average of 14.3%.

Arab banks - ROA and ROC

Respectable returns

Saudi Arabia’s lenders have also performed well in this year’s ranking. Despite the challenges of lower oil prices and reduced government spending, which dented 2016 fourth-quarter profits, the country’s banks registered the second highest aggregate return on assets at 1.87%, though this was a reduction from the 2% achieved in the 2016 ranking. This was accompanied by asset growth of 2%. Meanwhile, Saudi Arabia’s aggregate return on capital was a respectable 12.2%, which was just shy of the regional average. This performance was achieved with an above average capital adequacy ratio of 15.2%.

In the Levant, Jordan’s aggregate performance is the high point. The five Jordanian banks featured in the current ranking have registered a 1.86% return on assets. Pre-tax profits grew by 6.8% over the review period, well above the regional average of 1.4%. A healthy capital adequacy ratio of 11.38% was no barrier to achieving one of the stronger regional return on capital ratios of 16.3%. This strong performance came despite a general slowdown in economic growth in the country, which hit 2% in the previous ranking, down from 2.4% in the one before.

Nevertheless, Arab Bank, with its diversified geographic model, and the Housing Bank for Trade Finance – the two lenders that dominate Jordan’s banking landscape – have both recorded strong growth numbers over the review period, helping to lift the performance of the market as a whole.

Arab banks - Top 6 ROC

GCC lenders dominate

In terms of the overall footprint in the ranking, lenders from the United Arab Emirates have continued to dominate. A total of 22 Emirati banks are featured, an increase of two from the previous ranking. Ajman Bank has entered the top 100 at number 95 with $557m in Tier 1 capital, while a foreign-owned subsidiary, HSBC Middle East, features in 21st place with $4.17bn in Tier 1 capital.

In the main ranking, the top 30 largest banks by Tier 1 capital are once more dominated by lenders from the Gulf Co-operation Council (GCC). Only two non-GCC banks feature: Jordan’s Arab Bank in 16th place and Morocco’s Attijariwafa Bank in 28th. Inside the top 10, the main change is the rise of Qatar National Bank (QNB) to the top spot, unseating Saudi Arabia’s National Commercial Bank (NCB) in the process. QNB’s Tier 1 capital grew by more than 20% during the review period, compared with just over 8% for NCB.

Elsewhere, the Saudi British Bank and Abu Dhabi Commercial Bank have swapped positions from the 2016 ranking to come in at ninth and 10th place, respectively.

This year’s ranking does not take into account the merger between First Gulf Bank (FGB) and National Bank of Abu Dhabi. These lenders are both located in the top 10 banks and the new entity, First Abu Dhabi Bank, will become one of the largest banks in the region in the next ranking. Indeed, further merger activity across the region is expected as some banks look to consolidation as a way to address long-term  challenges.

Outside the top 30, the results are more geographically diverse. In 31st place is the National Bank of Egypt (NBE), having climbed four places from the 2016 ranking. NBE’s Tier 1 capital grew by 38% over the review period, putting it fourth in terms of institutions with the largest Tier 1 growth in this year’s ranking. By this metric, Egypt’s Afreximbank has also performed admirably, with 33% growth and fifth place by Tier 1 capital growth. In the main ranking, Afreximbank has jumped to 51st place, up from 59th in the previous ranking.

Elsewhere, 10 Lebanese lenders have once again made the Top 100 Arab banks ranking. Highest is Bank Audi, at 34 with $3.08bn in Tier 1 Capital. Blom Bank is a close second with $2.62bn in Tier 1 capital and 35th place in the top 100. Indeed, Lebanon’s banks have generally performed well this year, with aggregate pre-tax profits climbing by 21% accompanied by asset growth of just over 5% despite an exceedingly difficult domestic operating environment.

Drive to cut costs

As banks in the region adapt to less supportive operating conditions, most are looking at cost-cutting to improve their performance. In terms of their cost-to-income ratios (CIR), most lenders have made significant strides in this year’s ranking. Topping the CIR table is Banque Extérieure d’Algérie with 14%, accompanied by pre-tax profits of $415m.

This is notably better than the highest ranked bank by CIR in the previous ranking, which was CIB Egypt with 15.3%. CIB, which last year secured the top spot by CIR, has seen its costs rise significantly in the intervening period, posting 20.7% in the current ranking.

Another Egyptian lender, Afreximbank, has taken second place in the CIR stakes with 16.6% and pre-tax profits of $165. This marks a drop from last year’s 18.1%. Similarly, Qatar’s Masraf Al Rayan has improved significantly in the 2017 ranking as its CIR has fallen to 17%, down from 20.6% in the previous ranking.

Six banks in total have a CIR of below 20%, compared with just four in the previous ranking. Moreover, all 10 banks in the table have a CIR below 24%. In the previous ranking, only seven lenders achieved the same feat.

Better cost structures

Encouragingly, some of the region’s biggest banks have also made improvements to their cost structures. Saudi Arabia’s Al Rajhi Bank, the third largest lender in the region by Tier 1 capital, has reduced its CIR to 29.6% from 31.1%, while in the UAE, Abu Dhabi Commercial Bank’s CIR has fallen to 31.1% from 32.5%.

The region’s largest bank by Tier 1 capital, QNB, has fared less well here. Its CIR has climbed to 28% from 20% in the previous ranking, an increase likely to be linked to the acquisition of Turkey’s Finansbank, the fifth largest privately owned lender in the country by total assets.

Meanwhile, a closer look at regional lenders’ profitability once again throws up an encouraging mix of banks from across the GCC, the Levant and north Africa. Though profitability growth is slowing regionally, The Banker’s annual rankings have consistently demonstrated geographic diversification when profitability metrics are assessed in detail.

The top 20 growth table in pre-tax profits for banks with a return on capital above 15% is a case in point. In the previous ranking, seven out of the 20 banks came from the GCC, with the remaining institutions coming from north Africa and the Levant. In the current ranking, this split has remained the same.

Bahrain’s GFH Financial Group tops the table this year with 22% return on capital and pre-tax profits of $233m. This marks an increase of 1838% in terms of the group’s pre-tax profits. GFH’s strong year-on-year performance is partly due to recoveries secured during the review period, amounting to about $460m in assets. In second place is Tunisia’s Banque Nationale Agricole, boasting a return on capital of 17.6% and pre-tax profits of $77.3m, marking a 213% increase on the previous ranking. It is the first and only Tunisian lender to feature in this table over the past two years.

Arab banks - pre-tax profits

Lebanese profits up

Arguably, banks from Lebanon have given the most commanding performance in this table. Three institutions – Bank of Beirut and the Arab Countries (BBAC), Bank Audi and Société Générale de Banque Liban – are at four, five and six, respectively. BBAC has a return on capital of 16%, up from 12% in the previous ranking. The bank’s pre-tax profits hit $82m, a 51% increase.

Bank Audi, Lebanon’s largest bank by total assets, enjoyed pre-tax profit growth of 37% at $703m. Société Générale de Banque Liban saw its return on capital hit 22% in the current ranking, up from 20% previously. This was accompanied by a 37% growth in pre-tax profits, which hit $286m.  

Beyond these consecutively positioned Lebanese lenders, Blom Bank also features in the table in eighth place. This follows growth in its return on capital, which hit 23.7%, up from 20.2% in the previous ranking, as its pre-tax profits reached $623m, an increase of 26.6%.

Meanwhile, the presence of two Moroccan banks in this table is a notable change from the previous ranking. BMCE Bank Group has secured 17th place with a return on capital of 19.2%. This was accompanied by pre-tax profits of $391m, representing growth of 7% from the previous ranking. BMCE is joined in the table by Attijariwafa Bank at number 20. Attijariwafa’s return on capital was 23.7%, while its pre-tax profits grew by 3.9% to reach $850m.

Arab banks - Share of assets and profits

West African opportunities

Collectively, this performance is encouraging for the two lenders. Both have pursued ambitious growth strategies across francophone west Africa in recent years by commencing operations in a number of new markets. Though this approach carries risks, the potential long-term rewards are significant because much of west Africa remains underbanked or underserved by existing financial institutions. More broadly, this strategy follows a wider push by Morocco to become the financial services hub for north-west Africa.

Beyond Morocco, two banks from the top 10 of the main ranking by Tier 1 capital have also made the table. QNB secured 13th place based on a return on capital of 21.2% and pre-tax profits of $3.67bn, which has grown by 11% in this year’s ranking. Saudi Arabia’s Al Rajhi Bank joins QNB in the table at nine. The lender saw its pre-tax profits surge by 13% to reach $2.17bn, while its return on capital hit 15.6%.

Other profitability indicators remain equally diverse with a healthy spread of north African, Levantine and Gulf banks in play. In particular, the return on assets (ROA) table includes banks from Egypt, Jordan, Bahrain and the UAE. Bahrain’s GFH Financial Group once again tops this table with an ROA of 7%. It is followed by four Egyptian lenders, Arab African International Bank, CIB Egypt, QNB Al Ahli Bank, and the National Bank of Egypt, with ROAs of 3.4%, 3%, 2.9% and 2.7%, respectively.

UAE lenders that feature in this table include FGB, Al Masraf and National Bank of Umm Al Qaiwain. Meanwhile, Jordan’s Housing Bank for Trade and Finance and the Bank of Jordan also make the cut.

Gulf banks boost

The top end of the 2017 Top 100 Arab Banks ranking remains an exclusively Gulf-based affair. But the performance of the six largest lenders by return on capital in the 2017 ranking has been less impressive relative to recent years. Only Al Rajhi Bank recorded an increase to its return on capital in the current ranking, rising from 15.2% to 15.6%. The remaining five lenders – National Commercial Bank, Emirates NBD, National Bank of Abu Dhabi, Samba Financial Group and QNB – all saw modest declines in return on capital.

The current ranking highlights some of the pressures being felt by banks across the region. Profitability growth indicators are slowing in tandem with asset growth, and it is no surprise that banks are responding by cutting costs. But even as these difficulties are endured, regional lenders are maintaining their commitment to long-term, prudent growth, and Tier 1 capital continues to increase despite these challenges.

This is perhaps the most important takeaway from the rankings: years of careful planning and strategic thinking are beginning to pay dividends for regional lenders. More difficult times may be coming, but like few other global banking markets, the Middle East and north Africa region is prepared to face them.

Arab banks - tables


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