Arab banks offset the turmoil of the Arab Spring and offered a robust performance in 2011 with impressive growth across the key financial indicators. And with minimal exposure to the eurozone crisis, the region's banks are expected to continue their recovery from the global financial crisis.

Last year proved to be a stellar year of growth for the top 100 Arab banks around the world as they remained largely resilient to both regional and global economic woes.

While Arab banks recorded impressive growth across all key financial indicators, it is Tier 1 capital, considered the key measure of a bank’s financial resilience from a regulatory perspective and thus serving as a good barometer of a bank’s health, from which The Banker compiles its ranking. The aggregate Tier 1 capital of the 100 Arab banks in this year’s ranking has grown by an impressive 15.3% from $166.9bn at the end of 2010 to $192.5bn at the end of 2011. This is almost double the 8.7% growth seen last year. Simultaneously, the banks grew their assets by 8.36% from $1587bn in 2010 to $1739bn in 2011, while their aggregate pre-tax profits rose by 13% year on year to $29.27bn.

Twelve banks grew their assets by more than 20%, up from seven banks last year. Of these, two deserve a special mention – Qatar’s Masraf Al Rayan, whose assets grew by 59% to $15.2bn, and Egypt’s Afreximba Bank, whose assets rose by 50% to $2.9bn.

In a continuation of trends seen in previous years, heavyweight lenders in Saudi Arabia and United Arab Emirates continue to dominate the rankings – accounting for eight of the 10 largest banks by Tier 1 capital and six as measured by asset size. 

On a global scale, Arab banks tend to stand out for being well-capitalised when compared with their Western counterparts. Their average capital-to-assets ratio (CAR) – a measure of a bank’s ability to absorb a reasonable amount of loss – in this year’s ranking stands at 11.17%, compared with 10.51% in 2010. To put this in perspective, this figure is almost treble that of the aggregate CAR of western European banks, which stood at 4.25% at the end of 2011, according to The Banker’s Top 1000 World Banks ranking. It is also considerably higher than North American banks, whose aggregate CAR stood at 7.29%.

Resilience underpins Arab banks PIES

Qatar's rise

Saudi Arabia’s National Commercial Bank has retained its crown as the largest Arab bank as measured by Tier 1 capital. In second place is Qatar National Bank (QNB), which jumped from 11th position last year to second in this year’s table. Indeed, QNB is the star performer in this year’s top 100 Arab ranking. It also sits at the top of the ranking in terms of profitability – recording pre-tax profits of $2bn – as well as by asset size, with assets totalling $82.95bn, bumping the UAE’s Emirates NBD off the top spot. In fact, today QNB ranks as the largest bank by assets across the entire Middle East and north Africa region, as well as boasting the largest loan book in the region. Its 35.17% growth in assets during 2011 was driven largely by its 47.3% expansion in its loan portfolio. 

QNB’s high rankings are representative of the overall strong performance of the Qatari banking sector, with institutions from the country populating many of the top five key indicator tables. There are three Qatari banks in our top five banks as measured by Tier 1 capital, as well as two in both the top five assets and top five lowest cost-to-income tables. Qatari banks continue to ride on the back of the country’s economic boom. Since 2006, Qatar has outpaced its neighbours as the fastest-growing economy in the Middle East, and even the world in 2011 when it recorded a gross domestic product growth of 19%.

At 29.81%, the Qatari banking sector lays claim to having the highest loan growth of all Arab banking markets, a notable 10 precentage points higher than Morocco’s 19.84% in second position. Simultaneously, Qatar's banking sector has also managed to grow its deposit base by 26%.

Qatar faces sizeable funding requirements as it pushes ahead with its $185bn, five-year (2011 to 2016) National Development Strategy. Its successful bid in December 2010 for the 2022 football World Cup has further accelerated its growth plans, with $70bn set to be spent on infrastructure development over the next decade. This has given a shot in the arm to the entire Qatari banking sector and will provide a boon for the banks for many years to come.

Alongside Qatari lenders, Saudi Arabian banks also performed particularly well in terms of profitability. Aside from QNB, three of the seven banks that declared pre-tax profits of more than $1bn are Saudi Arabian lenders: Al-Rajhi Bank ($1.9bn), National Commercial Bank ($1.6bn) and Samba Financial Group ($1.14bn). The remaining three banks comprise two UAE lenders – National Bank of Abu Dhabi ($1.03bn) and First Gulf Bank ($1bn) – as well as Kuwait’s National Bank of Kuwait ($1.15bn).

ROA improvement

This year’s ranking also indicates an improvement – albeit a marginal one – in aggregate return on assets among Arab banks, from 1.68% last year to 1.69% this year. The UAE’s Rakbank maintained its number one spot for return on assets, which stands at 4.91%, up from 4.69% last year. 

Once again, the UAE banks deserve a special mention for putting their assets to good use in 2011 – comprising five of the top 10 banks as ranked by return on assets. Qatari and Egyptian banks also performed well on this front – with each country being represented twice in the ranking.

As was the case last year, there are only two banks in this year’s ranking that reported a decline in profits. These were the UAE’s Al Masraf, which ranked in 67th position with a loss of $52.42m, and Bahrain’s United Gulf Bank (UGB,) which ranked in 85th position with a loss of $3.03m. UGB’s investment income in 2011 dropped to $53.7m from $108.6m in 2010. Nearly all Kuwaiti investment companies performed extremely poorly in 2011 and UGB’s flagship subsidiary, Kipco Asset Management Company, in which it owns an 86% stake, was no exception. It recorded a net loss of $21.7m in 2011 compared with a profit of $6.4m for 2010.

Meanwhile, Al Masraf’s profitability was mainly hit by an increase in its non-performing loans due to classifications from its restructured portfolio, as well as a sharp reduction in its trade finance business with Libya – the Libyan Foreign Bank owns a 42.28% stake in the institution. 

Resilience underpins Arab banks TABLES

Arab Spring impact

Mirroring the trend seen last year, UAE and Bahraini banks heavily populate the top 10 capital-to-assets ratio table – contributing five and three banks, respectively. However, certainly in Bahrain’s case, this is arguably more a measure of reduced lending due to the social and political unrest that has been seen in the country since the onset of the Arab Spring in early 2011. This helps explain why loan growth across the Bahraini banks featured in this year’s ranking posted a contraction of 0.14%, the only Gulf country to post a contraction in lending.

The other three countries that posted contractions in lending were also caught up in the Arab Spring – Jordanian banks recorded a drop of 2.15%, Egyptian banks a decrease of 2.93% and Tunisian banks a fall of 2.98%. Indeed, Tunisian banks have been notably impacted by the political turmoil, recording the largest fall in profit growth among all Arab banks with a contraction of 40.56%. Their credit growth recorded a negative value of 2.98%, while overall asset growth was extremely slow at 2.99%. There is just one Tunisian bank in the top 100 this year compared with the four seen in last year’s ranking.

The impact of the revolution is also apparent on Egyptian banks, albeit on a smaller scale. Their profit growth contracted by 26.94%, their deposits by 6.4% and their loans by 2.93%. 

The Jordanian banking sector was also adversely affected. It has moved backwards across all four key indicators – assets were down by 5.67% and deposits were down by 3.83%, while deposit growth also contracted sharply by 6.45% and loan growth by 2.15%.

Excluding the Arab Spring countries mentioned, and to a lesser extent Bahrain, Arab banks have largely avoided exposure to the regional political turmoil. Furthermore, the Gulf Co-operation Council banks in particular have benefited from a buoyant regional economic landscape, supported by robust oil prices and high levels of government expenditure. This has enabled them to build up high levels of capital and solid income streams. This helps explain why Middle Eastern banks boasted the lowest regional average cost-to-income ratio in this year’s Top 1000 World Banks ranking of 39.69%, down from 41.37% last year. By contrast, North American banks recorded the highest ratio in our Top 1000 World Banks ranking of 64.63%. 

Little eurozone impact

Middle Eastern banks have also had minimal exposure to the eurozone debt crisis and US subprime debt that has adversely impacted the performance of most Western banking systems.  

Given their limited lending and investment exposures to the eurozone, Arab banks do not need to set aside as many provisions to cover their loan losses. As a result, they are expected to continue their gradual recovery from the onset of the global financial crisis in 2008 throughout the rest of 2012 and 2013.

The trend of declining loan loss provisions and improving asset quality is fuelling the improvement in earnings at most Arab banks. While they will continue on an upward growth trajectory, growth is expected to be slow over the next couple of years as banks exhibit a conservative lending stance, given the uncertainties in the global economy.

Furthermore, pockets of risk do exist. Aside from the Arab Spring countries, credit risk remains high in the UAE and Kuwait due to the significant number of reported restructured loans, which could always be renegotiated again.

In the UAE’s case, risks mainly relate to the debt overhang of some Dubai-based government-related entities (GREs). Meanwhile, exposure to local investment companies remains a risk for asset quality for Kuwaiti banks. On top of this, Kuwaiti lenders are grappling with a dearth of lending opportunities. Credit growth is essentially driven by GRE projects, which continue to be delayed, while lending to domestic customers stood at a very low 1.7% in 2011. This explains why, excluding the Arab Spring countries, it was the only banking sector to record a contraction in profit growth of 3.76%.  

Arab Bank Rankings top 10 banks


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