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RegulationsMay 1 2012

Middle Eastern banks look to move up a gear

Armed with deep pools of liquidity, many Middle Eastern banks are exploring new avenues of growth, from expanding their regional presence to concentrating on innovation within the Islamic finance sphere.
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Middle Eastern banks look to move up a gear

The advent of the global financial crisis in 2008 has ushered in a new era of banking. As institutions strive to return to growth, they have been confronted with regulatory hurdles and changing economic landscapes. This has forced banks around the world to rethink their growth strategies and the Middle East banking industry has been no exception.

A desire to reinforce the quality of assets, protect existing market share, optimise balance sheet performance and pursue sustainable growth are all broad-brush themes that emerge throughout The Banker's Middle East and north Africa (MENA) banks strategies for growth report.

In its Financial Access and Stability review published in September 2011, the World Bank warns that MENA banking systems, while large compared with other emerging markets and having survived the global financial crisis relatively well, are underdeveloped. It highlights the example that only 2% of Gulf Co-operation Council (GCC) banks’ loans are lent to small and medium-sized enterprises (SMEs). 

Of course, this lack of development is also a measure of the room for growth. At a time when most banks are struggling to grow, the fact that MENA banks are well-capitalised and have the funds at their disposal to exploit new growth puts them in an enviable position. Indeed, many MENA banks today are actively engaged in pursuing new revenue opportunities and diversifying their income streams.

Filling the Gulf

Many banks in the United Arab Emirates, Kuwait and Lebanon, which have relatively small, already well-served local markets, have adopted a notably broader international outlook. National Bank of Kuwait, for example, is reaffirming its focus on the Gulf region. Indeed, the consensus among most MENA banks is that the Gulf is a safe haven for investment. While the prevailing Arab Spring is continuing to cast a cloud over both Egypt and Syria, and political tensions persist over Iran’s alleged nuclear programme, the oil-rich Gulf countries are squarely focused on economic diversification. 

The International Monetary Fund projects that non-oil gross domestic product (GDP) growth will exceed 5% in the GCC in 2012, not only supported by the high oil price and fiscal stimulus, but also by strong trade links with rapidly growing Asian economies. The six GCC states have an estimated $1800bn of capital investments under way or planned for the next 15 years, according to a report published in March 2012 by ratings agency Moody’s.

In particular, both Saudi Arabia and Qatar are seen as fertile ground given the large-scale government expenditure programmes under way there. In June 2010, the Qatari government embarked on a $100bn, five-year expenditure plan devoted to infrastructure projects, while the announcement in December 2010 that Qatar had been chosen to host the 2022 football World Cup has served as a further catalyst for infrastructure expenditure in the country – estimated at $65bn by the Washington, DC-headquartered Institute of International Finance. Meanwhile, Saudi Arabia plans to spend $373bn on social development and infrastructure projects between 2010 and 2014.

Rise of sukuk

At a time when the GCC faces sizeable financing requirements, the trend by Western banks to pull back from the region is leading Middle Eastern borrowers to increasingly turn to local investors and alternative forms of financing, prompting a resurgence in the sukuk (Islamic bonds) market. In the first three months of 2012, $6bn of sukuk were sold across the GCC, fast approaching the $7.3bn issued in the whole of 2011, according to data from Middle Eastern banking group Emirates NBD. 

This Islamic financing tool’s recent comeback has been particularly apparent in Saudi Arabia, where new milestones have been set. In October 2011, Saudi Aramco Total Refining and Petrochemical Company launched a SR3.75bn project sukuk – the region’s first public-project sukuk. The issuance was important – both symbolically and from a structuring point of view – and there are now several other potential Saudi issuers lining up to go to the market who are talking about raising funds in this way.

This could trigger a trend in project sukuk, especially for financing future multi-billion dollar infrastructure and industrial developments in Saudi Arabia. For instance, national oil company Saudi Aramco has more than $160bn planned in project spending for the next decade or so. While strong fundamentals in the GCC should support all its stock markets, Saudi Arabia is likely to be a favoured market.

“We see attractive investment opportunities across the GCC, but believe Saudi Arabia should be on every investor’s radar, especially since direct access for qualified foreign investors to this market seems just a matter of time," says UAE-based investment banking group Rasmala in a February 2012 report. "But we also see this market as one of the biggest beneficiaries of high commodity prices and infrastructure spend.” 

The debt capital markets in general look set to be a hotbed of activity. Middle Eastern debt issuance reached $11bn during the first quarter of 2012, nearly double the $5.7bn raised during the same period in 2011, according to a report published by research firm Thomson Reuters in April 2012. Investment grade corporate debt accounted for 81% of all Middle Eastern debt capital market activity during the quarter, while high yield accounted for 10%.

Middle Eastern banks look to move up a gear TABLE

Into Iraq

Aside from the focus on the Gulf and higher debt market trading volumes, several Middle Eastern banks are also showing an improving appetite for less penetrated markets such as Iraq. “Arab Bank Group already enjoys the largest Arab branch network in the world,” says Abdel Hamid Shoman, chairman of Jordan’s Arab Bank. “At the current time, we are focused on strengthening our existing network, but we are also considering re-entering Iraq in the near future. We had a presence there before being nationalised in 1964.” 

Awash with liquidity, the Lebanese banking sector, whose total deposits amount to $115bn in a country with a GDP of $41.5bn, is also eyeing up Iraq. “The resources available in the Lebanese banking sector by far exceed the current and medium-term needs of both the private and public sectors,” says Nadim Kassar, general manager of Lebanon’s Fransabank. “This is why we have expanded regionally and internationally in selective locations and accordingly channelled additional resources to diversify our income. We are now looking at Iraq.”

Meanwhile, another Lebanese lender, Byblos Bank, opened its third branch in Iraq in March 2012. Located in Basra, the branch strengthens the bank's network, which also extends to Erbil, the capital of Iraqi Kurdistan, and Baghdad, the national capital. The bank's activities in Iraq cover corporate, commercial and correspondent banking services, including transfers and trade finance. 

“We are doing a very good business in Iraq so we are likely to open one to two more branches there,” says Sami Haddad, general manager of international banking and investment at Byblos Bank. “Our main growth opportunities today are expanding into Iraq and working with Lebanese companies in the GCC and west Africa. We have considered opening affiliates in one or two west African countries.” 

Lebanon looks away

Byblos already runs Byblos Bank Africa, a fully fledged Islamic bank in Sudan, a representative office in Nigerian metropolis Lagos and a subsidiary in the Democratic Republic of the Congo called Byblos Bank RDC. “Today, Lebanese banks’ main concern is to diversify away from the Lebanese sovereign risk to which we remain heavily exposed,” says Mr Haddad. Indeed, Lebanese banks’ loans to the government stand at $30bn, or 77% of Lebanon’s GDP. “We want to lend more to the private sector but demand for credit has been slowing down in our economy,” says Mr Haddad.

Bank Audi, the behemoth of the Lebanese banking industry, with total assets of $28.7bn, (equivalent to 69% of the country’s GDP), has set its sights on becoming a major regional player. It currently has exposure to 55% of the Arab population and 66% of the Arab world’s GDP.

“We are aiming to position the group within the inner circle of major regional players,” says Freddie Baz, group chief financial officer and strategy director at Bank Audi. “We launched our regional expansion strategy in 2006 and all our growth has been organic. We have just been granted a licence to set up a deposit-taking bank in Turkey which we hope will be operational in the third quarter of [2012]. We want to capitalise on the increased trade synergies between Turkey and the Arab world, which are valued at $33bn per year.”

Bank Audi was granted the universal banking licence in October 2011 – the first new licence to be awarded in more than 10 years – and now plans to establish a subsidiary with $300m of share capital. It aims to build a franchise ranking second to its Lebanese one in terms of size, targeting 10 branches by June 2013 and 50 branches in 2016.

“We are also interested in tapping into the retail market – particularly small and medium-sized enterprises [SME] – in Saudi Arabia,” says Mr Baz. “We are not interested in commercial banking in other GCC states because it is already a saturated market but we are evaluating private banking and corporate finance opportunities across the GCC as a whole.”

The bank has also been pursuing a successful domestic strategy to grow its corporate business and deepen its relationship with SMEs. Corporate customers and loans experienced compound annual growth rates of 26% and 16%, respectively, over the 2009 to 2011 period, while loans to SMEs rose by 15% over the same period. Blom Bank, Lebanon’s second largest bank by asset size, is also mulling a regional expansion.

“We are interested in Iraq, and we already have a representative office in Abu Dhabi but we are trying to open a bank,” says Saad Azhari, chairman and general manager of Blom Bank. “Similarly, we have an investment banking licence in Saudi but we would like to get a commercial one.”

Keeping a balance

In weighing up new opportunities, banks must remember to apply the lessons of the global financial crisis and pursue growth through reasonable risks. In continuing to implement more stringent regulation in line with international standards, keeping a balance between meeting these requirements and achieving a good return on capital should prove a challenge.

“Given the overriding economic and regional political instability, we are more concerned about efficient operations and sustainable growth, as opposed to rapid expansion and quick returns,” says Arab Bank's Mr Shoman. “Long-term goals take precedent over short-term gains. Arab Bank has been present in the region for more than 80 years and has witnessed many different challenges. Our conservative approach, as well as our insistence on maintaining high liquidity levels, has shielded the bank during times of instability and kept us well positioned to take advantage during times of growth.”

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