100 top Arab banks special report: the momentum of globalisation and banking innovation is changing the landscape of the financial services industry in the energy-rich Middle East region, and posing new challenges and opportunities for banks and their clientele. Researched and written by economic analyst Moin Siddiqi

Middle East, The, Oct, 2007 by Moin Siddiqi

BANKING ON INCREASED MARKET LIQUIDITY

From the construction boom in the United Arab Emirates (led by dynamic Dubai) to upstream oil/gas expansion projects in Saudi Arabia and Qatar, the evidence of buoyant economic conditions in a region swamped by the flood of petrodollars is easy to observe and the positive spillover effects on the real economy are benefiting both corporate and retail operations.

Indeed, the Gulf region's six member countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE)--the powerhouses of Arab banking--are witnessing their strongest expansion in three decades, as respective governments boost capital spending, economies diversify, and legal/regulatory systems are reformed to promote foreign direct investment. The International Monetary Fund (IMF) noted that Gulf economies registered annual growth of almost 7% between 2003 and 2006, up from 3% a year during 1998-2002. Encouragingly, this robust growth has more banking implications, with large investments in manufacturing, real estate, tourism, telecom and transportation. Major players like the National Commercial Bank, National Bank of Kuwait, Abu Dhabi Commercial Bank, Emirates Bank Group, Qatar National Bank and Arab Banking Corp, among others, are benefiting from benign market conditions.

Adel El Laban, CEO of Bahrain-based Ahli United Bank, said: "The Gulf region is still very much enjoying the good times. Oil and gas prices are high and government spending is prudent, unlike in previous booms. The petrodollars flooding into regional economies have a cascading effect. The revenues enter at government level and flow into the economy, creating a growing middle class." Robert Eid, CEO of Saudi-based Arab National Bank (ANB) is, too, bullish.

"The economies of the region are more diversified and more efficient than ever. The pie is so big now, that there is plenty of opportunity for funds to be absorbed locally." However, the ANB chief cautioned: "Sustainable growth doesn't mean that the boom will last forever and it doesn't negate cyclicality. Some segments, such as the property market, could slow, but the overall outlook is extremely positive."

Fast-growing local economies, with all the associated demand for financial services, is a banker's ultimate dream. Sophisticated clients expect diverse 'product-lines' ranging from project (asset-based) financing, structured trade finance, venture capital as many firms seek to raise private equity/debt to fund expansion, hedging of exposures to commodities, foreign exchange and interest rates, corporate advisory (including fiduciary/custodian services), underwriting for initial public offerings (IPOs), and innovative Islamic products, as well as wealth management for high-net-worth-individuals (HNWIs) and public/private institutions.

Regional heavyweights see private banking and investment banking as a lucrative business. According to the Qatar Financial Centre (QFC), the total number of HNWIs in the Middle East grew by about 10% in 2005, with gross investable assets of over $1 trillion. In portfolio management, the average assets under management in the Gulf region rose at an annual rate of 19%, from $20bn in 2001 to $57bn in 2006. Whilst in the investment banking arena, the total number of deals doubled from 101 in 2004 to 220 in 2006. That, in turn, provided substantial fee-based revenues for banks.

The total consolidated 2006 assets in The Middle East's Top 100 Arab Banks rankings reached a milestone figure of $1 trillion, up 33% on 2004, while total capitalisation surged by 61% to $113.79bn. The Gulf Co-operation Council-based banks dominate the listing with 62 lenders and a total of $88.93bn and $662.77bn, respectively, in aggregate Tier 1 capital and total assets, with the remaining coming from Iran (9), Lebanon (8), Egypt (6), Tunisia (5), Jordan and Morocco, each with three banks in our listing. In fact, only five non-Gulf institutions--namely Bank Saderat Iran, Jordan's Arab Bank, Lebanon's Audi Saradar Group and BLOM Bank and Morocco's Credit Populaire du Maroc--are adequately capitalised by global standards. But others, like National Bank of Egypt, Commercial Bank of Syria and Bank Mellat Iran remain severely under-capitalised and reserves are insufficient to cover actual or potential losses. They also carry huge non-performing loans (NPLs), i.e. bad debts.

In recent years, premier Gulf institutions plus Arab Bank (which is truly a global player with operations across five continents) have outperformed their counterparts from other developing regions in key banking indicators, such as capital-adequacy, profitability, asset-quality and cost/income ratios. Moreover, internal capital models and risk-management techniques compare favourably with western banks. The UK Banker survey shows the UAE, Bahraini and Saudi banks last year had a capital/assets ratio of 18%, 17% and 14.2%, respectively, well above the Basle Committee's 8% benchmark.

In terms of earnings, Saudi banks led the region with an average individual bank return on core capital (i.e. shareholders' funds) of 29.2%, followed by Kuwait (27%) and the UAE (19%). On a measure of efficiency, the Middle East boosted the world's lowest cost/income ratio--with Kuwait at 23.7%, the UAE (30.6%), Bahrain (31.1%) and Saudi Arabia (31.4%). By contrast, banks in Poland, Japan, France, Canada and the US reported cost/income ratio of 74.5%, 69.4%, 63.9%, 66.9% and 59.9%, respectively, according to the UK Banker survey. Meanwhile, the average NPLs for GCC banks were estimated at mere 3.5% of total loan books in 2005. JP Morgan Chase & Co. commented: "Following some difficult years at the start of the decade, the net income of the banks of the Gulf states have returned to healthy levels and are showing strong economic earnings growth as they benefit from a strong macro environment (driving loan growth), restructuring (controlling costs and upgrading IT) and improving asset quality."