The debate over the competitiveness of financial centres is complex and multi-faceted but the actual performance of the institutions in those jurisdictions is quite another matter. In March, The City of London’s Global Financial Centres Index recognised Bahrain as the world’s fastest-growing financial centre, ranking it at 39th, up three places and the only Gulf centre to improve (Dubai moved down two places to 24th and Qatar moved down three places to 47th.
Taking a closer look at the banks in Bahrain, especially the locally incorporated banks, which were the winners and losers in 2007, and which are likely to make an impact this year and in the future? Basking in the region’s high oil prices and booming economic conditions, it is no surprise that Bahrain’s banks achieved record net profits.
According to Central Bank of Bahrain (CBB) data (see table facing), the aggregate net profits of locally incorporated Bahrain banks, both conventional and Islamic, reached $2329.4m in 2007, a 14% increase on the $2043.9m achieved in 2006. And the profits would have been significantly higher again if two major banks, Gulf International Bank and Arab Banking Corporation, had not been adversely affected by the US subprime crisis. Nevertheless, only these two, and Bank of Bahrain and Kuwait suffered directly from the US crisis and Bahraini institutions were effectively damage free.
The table of $2.3bn in record net profits is broken down into four categories: wholesale, retail, Islamic (wholesale), Islamic (retail). The changes and growth in these segments indicates not only the massive expansion in Islamic banking but also some new names in the market, such as Ithmaar Bank, Global Banking Corporation and Capivest, to name a few, which are bringing fresh dynamism to the sector.
The big change in 2007 is the increasing role of the Islamic sector, both wholesale and retail, where aggregate net profits rose dramatically by 73.2% from $666.1m in 2006 to $1153.4m in 2007. This huge increase in profits was reflected in both Islamic wholesale (up 66%) and Islamic retail (up 93%), and corresponds to the growing attraction and sophistication of Islamic finance throughout the region.
The Islamic banks now account for 50% of the aggregate net profits of Bahrain’s banks, considerably higher than the 33% they accounted for in 2006, and lesser shares in previous years. With the growing attraction of sharia-compliant products and firms, this role of Islamic banks in the overall profits of Bahrain’s banks may even be on the increase.
Slumps for some
However, looking closer at the individual segments of the profits table, it is clear that the conventional wholesale banks are unlikely to have as poor a year again as 2007, when profits slumped 37.5% to $554m. The major factor behind this slump was the net loss of $757.3m reported by Gulf International Bank (GIB), the third largest bank in the country, in 2007. While GIB’s operating income was up 34% on the previous year with strong growth in regional project finance earnings, the Gulf’s leading investment bank was forced to take a huge $1bn in provisions. This related to structured investment vehicles (SIVs), and collateralised debt obligations (CDOs) incorporating exposures to the US subprime sector, and resulted in the loss.
GIB chief executive Dr Khalid Al-Fayez tells The Banker of the irony that 98.5% of the bank’s investment portfolio was investment grade at the end of 2007, adding that ratings are becoming meaningless, and yet the bank took the hit and its owners, the six Gulf
Cooperation Council (GCC) states, agreed in February this year to increase its share capital by $1bn to $2.5bn. Although Dr Al-Fayez acknowledges the boom in the region relative to elsewhere, he also notes concerns over inflation, the shortage of skilled labour and a possible real estate bubble. And he is adamant that the currency peg to the dollar is not a major factor in worries about inflation. On the issue of GCC currency union, he says that the region needs a viable common market first, then a common currency will follow.
Capital issue
Besides GIB, Bahrain’s second largest bank, Arab Banking Corporation (ABC), also suffered from the subprime crisis, with net profits dropping from $202m in 2006 to $125m in 2007. In March, approval was given to increase issued capital from $1bn to $1.5bn by way of a pre-emptive rights offering. And in April, Hassan Ali Juma, formerly head of National Bank of Bahrain, took over as president and chief executive of ABC following the retirement for health reasons of the well-respected Ghazi Abdul-Jawad, after 11 years at the helm.
Bahrain’s biggest bank, Ahli United Bank, (AUB) however, achieved a record net profit of $296.3m in 2007, up 42.8% on 2006. It avoided the US subprime troubles and continued its regional strategy to acquire and expand banks, on a fully owned or controlled basis, in the core Gulf countries with targeted 10% to 20% market share through mergers and acquisitions, and organic growth. Under chief executive Adel El-Labban, AUB has developed a diversified financial services group model with a truly regional approach. AUB has a significant presence in five out of eight target Gulf countries, only Saudi Arabia, UAE and Iran remain.
Expansion strategy
During 2007, AUB acquired a 35% stake in Alliance Housing Bank in Oman, which in January was rebranded Ahlibank (ABO). AUB’s strategy is also to acquire complementary banking platforms in identified secondary markets, having strong cross-border business flows with core Gulf countries and having formed Ahli United Bank (Egypt) – formerly Delta Bank – in 2006. It is also looking at Yemen, Lebanon and Switzerland.
From 5000 clients nine years ago, AUB now has more than 400,000 clients in seven countries and plans to increase its client base organically to 500,000 by 2010. With assets of $23bn and equity of $2.3bn at end-2007, it is also planning product expansion. In April, it signed a memorandum of understanding with the UK’s Legal & General Group to establish a regional sharia-compliant life insurance company. The 50/50 joint venture will initially offer a range of takaful life and health insurance products and pension plans to retail and corporate customers in the Gulf region, with Legal & General providing the much-needed insurance expertise and AUB the regional distribution network.
In another record performance, Investcorp, the world-renowned institution in global alternative investments, produced its highest profits ever of $302.3m in 2007. Strong growth was achieved in each of the bank’s five businesses – private equity, hedge funds, real estate investment, technology investment and Gulf growth capital – with record performance in both fee- and asset-based income, and growth in client assets under management of 47% to $9bn.
Among the smaller investment banks, the long-established BMB Investment Bank announced in March a $75m increase in paid-up capital following results for 2007, when profits rose 16.6% to $24.6m.
Looking ahead, the large conventional wholesale banks, such as AUB, GIB and ABC, are likely to achieve even better performances from the region as the increased budget expenditure and the boom takes root. And GIB and ABC are unlikely to see a repeat of their US problems, so profits for this segment in 2008 could double those of 2007, pushing net aggregate profits to well over $1bn.
Islamic stars
While the conventional retail banks, such as National Bank of Bahrain, showed strong, steady growth in 2007, with aggregate net profits rising 26.5% to $622m for the segment, the clear stars of the Bahrain banking arena were the Islamic institutions, whose total profits increased by a stunning 73.2% to $1153.4m. In 2007, not only did the range of sharia-compliant houses mature, but also a plethora of new Islamic institutions emerged, especially in the investment banking area. Of the nine new banks licensed by the CBB in 2007, six were Islamic.
A key example of the growing strength of Islamic investment banking operations is Gulf Finance House (GFH), whose profits expanded from $9m in 2001 to $340m last year. GFH has launched several innovative economic development infrastructure projects, which include Bahrain Financial Harbour and Al Areen Development in the Kingdom of Bahrain, Royal Metropolis in the Kingdom of Jordan, and Energy City Qatar in Doha, Qatar. Recent projects include Gateway to Morocco in the Kingdom of Morocco, and Energy City India in Mumbai, India.
Under chairman Esam Janahi, GFH has been involved in a diverse range of pioneering projects. In February, it launched First Energy Bank, the region’s first bank tailored to the energy sector and designed to capitalise on the huge anticipated demand for investment in the global energy industry. Also in February, it announced plans to establish a $3bn development zone in Algiers, similar to the one launched in Mumbai in 2007.
Like GFH, Unicorn Investment Bank produced record profits on a broad regional and international strategy. In 2007, its net profits rose 66% from $30.1m to $50.1m. In July, it closed a groundbreaking $1bn sukuk for Saudi real estate developer Dar Al-Arkan, the largest to be issued by a Saudi corporate in the international capital markets.
In January this year, Unicorn significantly strengthened its international presence by acquiring a 75% stake in Inter Yatirim Menkul Degerler, a Turkish brokerage and asset management company now renamed Unicorn Capital. The bank also completed the initial capital raising for the Unicorn Strategic Acquisition Fund, with a select group of investors committing $150m towards its target of creating a $1bn fund to take strategic stakes in and manage financial institutions.
Strong player
Another important market player is Ithmaar Bank, which following its successful initial public offering in March 2006 and listing on the Bahrain Stock Exchange, produced strong results in its first full year of operations with net profits of $188.3m in 2007. With its vision, according to chief executive Michael Lee, to be the benchmark international investment bank from the Middle East, the Ithmaar banking group consists of a diverse combination of 17 subsidiaries, associates and joint ventures. It includes Ithmaar Bank, Shamil Bank (now a 100%-owned subsidiary), Faysal Bank Limited, Faisal Private Bank, Solidarity, First Leasing Bank and Ithmaar Development Company.
Among many achievements, the bank’s private equity funds made strong progress with the Aldar Private Equity Fund achieving its first closing of $200m in November and the bank acquiring 19.2% of Bank of Bahrain & Kuwait in February.
Small but growing
Among the smaller, well-established Islamic institutions, there is also considerable growth. Net profit at ABC Islamic Bank for the first quarter of 2008 rose to $6.8m, a 98.5% increase over the same period last year. And net profits at AlBaraka Islamic Bank grew by 90% to $5.3m in 2007, and the bank opened six branches in Bahrain to reach a total of 18 branches overall.
There are a number of newcomers in the sharia-compliant space. Established last June, Global Banking Corporation’s vision is to be the leading investment bank in the GCC. With a paid-up capital of $250m and a staff of 50, it sees itself as a bridge not only in the GCC but also in Europe and Asia.
Capivest, formerly Khaleej Finance & Investment, is also very ambitious. It recently doubled its paid-up capital to $110m and sees huge opportunities in the Gulf and the region, including its $110m First India Private Equity Fund.
The Islamic institutions achieved strong profit growth in 2007 but can they keep the expansion going? Although there are large financing opportunities and needs for investment banking skills, it is not clear that all the new players have the funding and business plans to survive among the greater competition in the longer term. With many heavily reliant on the real estate sector, and the CBB keen to avoid a real estate ‘bubble’ and limit aggregate exposure to the sector to 25%, many institutions could be severely squeezed. For Bahrain’s banks, including the Islamic institutions, huge opportunities in the region exist but it is not necessarily all plain sailing.
