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Best-performing banksNovember 3 2003

Gulf gets a retail boost

While Gulf banks enjoy strong results, banks in non-oil countries have seen a drop in their profits. Stephen Timewell reports.
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Banks in the Gulf, the dominant force in Arab banking, are going from

strength to strength, largely on the back of the expanding demand for

retail financing. Despite political turmoil in the region and a

sluggish world economy, financial sector activity remains robust with

the strong profitability achieved in 2002 growing even stronger this

year.

Saudi Arabia’s 10 banks, which account for 26.4% of the total Tier I

capital of the Top 100, produced strong results in 2002. Overall

pre-tax profits expanded by 6.1% to $2.9bn, amounting to a healthy

average return on equity of 21% across the sector. This year, profit

growth has improved with interim results up an average 14.9% over 2002

and Al-Rajhi and Arab National Bank showing 49.6% and 24.8% growth

respectively.

Retail diversification

Commenting on the benefits of retail for Gulf banks, Standard &

Poor’s CreditWeek said: “Retail banking has been a powerful means of

revenue diversification out of the more risky commercial banking area,

and it has also constituted a major source of profitability, given the

limited amount of risks it carries.” It added: “The most impressive

growth was witnessed in Saudi Arabia, where outstanding retail loans

(consumer, personal, house, car and credit card loans) increased to a

total of $14.6bn in 2002, from $2.5bn in 1997.”

This six-fold increase in Saudi Arabia comes as sovereigns and

corporates in the region have limited their appetites for bank

financing. For the two biggest Top 100 banks, National Commercial Bank

of Saudi Arabia and Saudi American Bank, retail constitutes 65.2% and

58.4% of profits respectively. While elsewhere in the Gulf retail

contributes an average of 40% of banks’ reported profits, S&P

believes the medium-term expectations for retail are favourable and the

growth in Islamic products adds another positive dimension.

Banks outside the Gulf, 46 of which are in the Top 100, have fared less

well. Ten of the 14 Egyptian banks listed showed reduced profits in

2002. Profits in other key banking markets, such as Lebanon and

Morocco, were largely down, apart from Banque Audi and Credit du Maroc.

Prospects in non-oil economies look weak and the outlook for mergers

remains static. Lebanon is ripe for banking consolidation and expansion

into Syria; three licences have been granted to Lebanese banks in Syria

but progress is gradual at best.

Stable structure

The structure of Arab banking, the Gulf included, has remained

remarkably stable. Mergers have been virtually non-existent and

although the UAE, which has 47 local and foreign banks and 17 banks in

the Top 100, has long been regarded as over-banked, the prospect of

consolidation among local players is limited. Family and local ties run

deep. As a result, the structure of the Top 100 looks little different

from that of previous years.

Nevertheless, the total Tier I capital of the Top 100 rose by 6.3% in

2002 to reach $51bn and aggregate total assets also increased to

$612.7bn. The 54 Gulf banks in this listing account for 71.2% of

aggregate Tier I capital and $5.7bn in profits, and, given the growth

in retail and buoyant banking outlook, the figures for 2003 are set to

rise even higher.

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