The oil price crash has sparked consolidation and modernisation among Arab banks, changing the region's financial landscape for the better.
More than four years after oil prices started their steep decline, the Arab world has changed beyond recognition. Oil-exporting economies, once comfortable relying on hydrocarbon revenues, are now enacting reforms to diversify their economic models. Changes that have been discussed for years are now being enacted. This ranges from the modernisation of capital markets to the reform of decades-old subsidy and tax regimes.
Such a shift would have been unthinkable without the political capital accrued by an oil price crash that stemmed, half a world away, in the shale fields of North America.
As key economies are reforming, the implications for the region’s banks are just as notable. The Banker’s Top 100 Arab Banks ranking for 2018 makes clear that Arab banks are experiencing one of the biggest shake-ups in their history. Overbanked markets with less abundant growth opportunities are forcing many to look to consolidation.
This has already occurred with the headline merger of the National Bank of Abu Dhabi and First Gulf Bank. It looks set to continue with more intra-market deals in Saudi Arabia and the United Arab Emirates in the pipeline. More interestingly, the amalgamation of Kuwait Finance House and Ahli United Bank in Bahrain is also on the cards.
As consolidation takes hold in the Arab world's more advanced markets, another story is emerging in the larger but less developed countries. Banks from Egypt, Morocco, Tunisia and Jordan, among others, have emerged as profit-making powerhouses, as they surf the wave of economic growth and reform that is taking place in these jurisdictions.
As a result, many banks from these markets easily outperformed regional averages, both in terms of profitability and asset growth. Over the coming years this trend is likely to accelerate as administrations in Cairo, Tunis and Rabat in particular enact much-needed and liberalising reforms.
Taken together, these two trends are going to reshape the regional banking sector for the better. One the one hand, consolidation in key Gulf markets will ultimately produce stronger and safer banks, while on the other, lenders in higher growth markets will emerge as key regional players in their own right.
