In the past three years, Gulf lenders have increasingly looked west, to north Africa, to expand their operations beyond their own shores. Banks based in Qatar and the United Arab Emirates in particular have been looking at international expansion in search of profits, and also to cement political alliances and compete for regional influence.
Emirates NBD's Egypt mission
For Emirates NBD, the reasoning behind such a move was the result of over saturation in its domestic market. “For us to grow further we had to expand internationally,” says Giel Jan Van der Tol, CEO of Emirates NBD Egypt of the bank's move into north Africa.
Emirates NBD bought a 100% stake in BNP Paribas Egypt in December 2012. “We wanted to expand in the Middle East but had been eyeing Egypt for quite some time because it's a market with a different dynamic, and an underbanked market,” says Mr Van der Tol.
“We made the decision to come in at a time when [there was social upheaval] and when there were political uncertainties, but with a clear view to invest in the long run. The depth of market is an important consideration for us and it’s a huge opportunity. And with the size and depth of the market here, we believe we will be very competitive.”
QNB spreads it wings
Other Gulf banks have made similar calculations. One such example is one of the Gulf region's largest banks, Qatar National Bank (QNB), which is now present in Egypt, Libya and Tunisia.
In April 2012, QNB began its North Africa drive by acquiring a 49% stake in Libya's Bank of Commerce and Development. One year later it bought out the remaining shares in the Tunisian-Qatari Investment Bank, an entity in which it had held a considerable stake in since 1982.
In 2013, QNB also bought 100% of Société Générale's Egyptian operations. At the time, the institution was the second largest publicly traded bank in the country. The renamed QNB Al-Ahli now has more than $11bn in assets. QNB has been looking carefully at investing in Morocco and signed a memorandum of understanding on co-operation with Morocco's Attijariwafa Bank in 2013.
According to QNB's chief financial officer, Ramzi Mari, the bank is still looking to expand. “Our goal is to be the largest financial institution in the Middle East and Africa by 2017,” he told Reuters in February 2014.
Target: north Africa
The Gulf bank that has perhaps attached the greatest importance to its operations in north Africa is Bahrain's Al Baraka, which has operations in Tunisia, Libya, Egypt and Algeria.
Al Baraka's CEO, Adnan Youssef, has publicly stated that the bank is planning to establish an Islamic banking arm in Morocco with $50m of capital during 2015. This would give the bank a presence in all five north African countries.
Another Qatari bank, Masraf al-Rayan announced that it intended to buy a $274m 'strategic share' in a commercial bank in Libya in 2013. That deal, however, was eventually put on hold by the bank after the security situation in Libya radically deteriorated. The acquisition target was never named.
It should be noted, however, that not all Gulf banks operating in Egypt only woke up to the country's potential in the past decade. The UAE's National Bank of Abu Dhabi built its operations in Egypt from scratch after entering the country in 1975. The bank also set up operations in Libya in 2008.
Saturation point
One of the primary reasons behind this expansion is the recent growth that Gulf banks have experienced. Between 2008 and 2013, the total assets of banks headquartered in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE rose by more than $600bn.
Ratings agency Standard & Poor's forecasts that those combined assets could grow by a further $300bn during 2015 alone, hitting the $2000bn mark. Armed with an ever-growing access to liquidity, Gulf banks have an enviable war chest to fund overseas expansions.
Indeed, banking operations in countries such as Egypt and Turkey are proving particularly popular, according to Timucin Engin, a director of financial services ratings at Standard & Poor's. “In the Gulf Co-operation Council [GCC], growth has been slowing down, although there are still some opportunities here,” he says. “Banking in emerging markets is largely driven by population, and the total population of the GCC countries is less than 50 million people. Many of these 50 million people are in fact expatriates who generally use banks based in their home countries.”
The Gulf has a small population but is flush with banks, so therefore spreading out to north Africa would appear to be a natural development model.
European withdrawals
Mr Engin emphasises that the way has been cleared for Gulf banks in north Africa by the exit of European lenders, who quit the region either because of the economic crisis within the eurozone, or due to security fears in the aftermath of the Arab Spring uprisings. The sale of BNP Paribas' Egyptian operations to Emirates NBD is one example of this trend, as is the sale of Société Générale's Egyptian arm to QNB.
Fundamental changes in regulation in Europe saw many of European investors retrench from their more adventurous investments in places such as north Africa in order to focus on their core businesses. Société Générale was heavily influenced in its decision to sell to a Gulf bank by the Basel III capital requirements.
“With growing regulatory constraints on the leverage of their balance sheet, many European and US banks shifted the focus of their growth strategy to their core operations and geographies,” says Olivier Panis, vice-president and senior analyst at Moody’s. “That explains the withdrawal of several international banks from the Middle East and north Africa, such as BNP Paribas in Egypt, which gave the opportunity for GCC banks, benefiting from strong liquidity profiles and solid capitalisation, to make some opportunistic acquisitions.
“The financial and commercial interests of the GCC economies in Egypt continue to grow, illustrated by the recent $12bn of investments promised in March. Investments from GCC banks in Egypt have been correlated in the past few years with the growing support and investments from GCC countries to the Egyptian government, regardless of the changes in political regime. There is broader growing political and economic support from GCC countries to north Africa."
During Egypt's political crisis, many Egyptian companies moved their headquarters to Dubai, a development which helped to establish links between the GCC market and Egypt. In addition, Gulf companies such as retail development giant Majid al-Futtaim have recently expanded their investment in Egypt.
Egypt ripe
Aside from the drivers pushing Gulf banks abroad, and the gap left by the withdrawal of European lenders, Egypt in particular has qualities that makes it an enticing prospect for Gulf lenders. The net interest margin in Egypt is much higher than the GCC average, meaning cash-rich, well-capitalised Gulf banks see it as a promising place to do business.
Egypt also offers an environment where loans to households constitute only about 7% of the country's gross domestic product, as well as a highly concentrated banking system in which four major banks control more than 50% of the overall portfolio (by contrast, in the UAE there are more than 50 banks).
Egypt also has what one Gulf based banker calls “miserably low banking penetration” of about 10%. There can be little wonder, then, that so many Gulf lenders view the country as being highly profitable. Indeed, Emirates NBD made about $60m in net profit in Egypt in 2014, a 22% increase on 2013. Its net banking income in the country was also up by $180m, or 20%.
Ratings agency Moody's announced on April 7 that it had upgraded Egypt's credit rating to B3 from Caa1, with a 'stable' outlook, a decision the institution said was based on an improved macroeconomic performance. Part of the improvement in economic indicators in Egypt has come from the huge financial support from the Gulf monarchies following a military coup backed by Saudi Arabia and the UAE in July 2013.
The challenges ahead
Just as the opportunities for banks in Egypt are substantial, however, so are the risks. Egypt has a high level of non-performing loans. At about 9% on average, the figure is considerably higher than Gulf banks are used to.
Most of the net interest income for Egyptian banks at present stems in some way from investment in government securities. Were government bond yields to change suddenly, banks may struggle to find the same level of margin in other banking lines.
According to Angus Blair, CEO of the Cairo-based think tank the Signet Institute, one Gulf bank faces a tougher time in Egypt due to political changes. “QNB's buyout coincided with an anti-Qatar backlash for political reasons”, he says, referring to a wave of anti-Qatar fervour that followed Egypt's military coup. Qatar had backed the overthrown Muslim Brotherhood administration.
“It's going to be difficult for QNB to win new government business in the short term because of the political view of Qatar. In the private sector there is growth, but certainly now there are difficulties for the Qataris to compete against the Emirati banks,” says Mr Blair, adding that in a competitive marketplace, QNB can always offer better rates to reinforce its business.
There are also difficulties specific to the market in Egypt that are unfamiliar to the Gulf banks. Under Egypt's second president, Gamal Abdel Nasser, who ruled the country from 1956 to 1970, high taxation meant that many people avoided holding bank accounts, and lenders still struggle to translate low banking penetration into profits.
“One of the challenges is convincing people to come into banking when even elements of the wealthy don't use banks and do everything in cash,” says Mr Blair. “Of course, as the economy develops, the country will likely follow international trends.”
In addition, the path is not completely clear for Gulf lenders in Egypt. According to Mr Blair, other regional banks are also eyeing Egypt. “If you look at Egypt, the banks that have made the most impact are actually the Lebanese banks, which have been incredibly aggressive. In their home market, Lebanese banks have been constricted by political risk and so they've been expanding in Turkey and Egypt,” he says. Mr Blair gives the example of Lebanese lender Blom Bank as one such operation that has been active in Egypt.
Long-term trends
“If you look at the wider context, for a long period of time Gulf banks have been investing in Egypt,” says one senior banking analyst at a leading Dubai-based investment bank.
Natural ties between Egypt and the Gulf have been growing since around the 1970s, when Egyptians began to work in large numbers in the Gulf region. As a broader trend, Egypt's market liberalisation is a major factor. “From the Egyptian side, domestic policies have allowed foreign investment to come in and that's an important part of equation,” says the banking analyst.
In 1999, the Paris Club forgave debts owed by Egypt, leading to a top-down policy of market liberalisation. The country's central bank then moved from a fixed-rate to a floated exchange rate, and at the same time there was a push to clean up banking system assets, liberalise the system, and invite foreign direct investment.
The proximity of north Africa – and particularly Egypt – to the Gulf, the cultural similarities and the fact that no other market of north Africa's size is quite as accessible to Gulf lenders may be more important than short-term political movements.
However, in Mr Panis's judgement, most GCC banks will continue working in their core markets and will likely avoid more large purchases in Egypt for the moment. He says: “The majority of GCC banks will continue to focus on their core markets in the short term while domestic growth is still healthy. We expect GCC banks to grow more organically in their existing franchise. If the banks were to engage in any further acquisitions, it would be relatively small in size and aimed at completing the product offering or client coverage.”
However, others disagree and foresee even more merger and acquisition activity in the near future for Gulf banks in north Africa, especially Egypt. “Egypt is going to see a lot more investment,” says the Dubai-based banking analyst. “There are four or five banks that count for a huge share of the system and there is plenty of scope for more consolidation.”
Overall, says Mr Van der Tol at Emirates NBD, Egypt is an investment worth sticking with. Indeed, his bank now plans to expand its number of local branches in the country to more than 100 in the next three years.
“We've taken time to familiarise ourselves with the local market and now we have an ambitious growth strategy for the country as a key strategic market,” he says. “We now see Egypt in a sense as our second home market.”
