JEDDAH, 2 May 2003 — With over 209 banks operating in the GCC area, including a number of foreign banks, offshore banking units, specialized banks as well as 62 GCC-based commercial and Islamic banks, the Gulf region seems to have sufficient financial resources in order to aid in the economic development of the region. While GCC banks have benefited from the oil boom of the late 1970s and early 1980s, the operating environment has somewhat changed with volatile oil prices, largely under a downward pressure, and the near completion of most of the major infrastructure projects. Consequently, GCC banks are now faced with a tougher, more competitive, environment that requires higher efficiency and a wider revenue base.
Traditionally, GCC banks have relied heavily on income generated from non-interest bearing accounts, while their markets were shielded from foreign completion to a varying degree across the Gulf states. Those non-interest bearing accounts, which constitute a large portion of deposits in GCC banks, have allowed Gulf banks to enjoy attractive interest rate spreads, thereby maintaining a steady stream of income even during downturns in oil revenues.
However, with the gradual opening up of GCC economies, local banks are faced with numerous challenges that could impact their profitability as well as their existence. In their attempt to face up to these challenges, leading GCC banks started to diversify their activities in the late 1990s from traditional retail banking and trade finance into more sophisticated investment and private banking products as well as Islamic banking.
Total assets of the 62 GCC-based commercial and Islamic banks are estimated to have increased by 5 percent to $310 billion in 2001 from $295 billion the year before. This represents over 96 percent of total GCC gross domestic product (GDP) estimated at $322 billion in 2001. In order to put this in global perspective, total banks’ assets to GDP in the United States is estimated at 78 percent, while that of the euro zone is much higher at 189 percent, which places assets of GCC banks in the middle. Even within the GCC area, this ratio varies from 152 percent in Kuwait to as low as 48 percent in Oman.
Meanwhile, deposits at GCC banks amounted to $249 billion in 2001, equivalent to 77 percent of the combined GDP of the six member countries. This ratio also varies widely among GCC countries, from as high as 98 percent of GDP in the UAE to as low as 30 percent of GDP in Oman. Bahrain, however, represents an exception since it is a major offshore banking center with assets of the eleven Bahraini based commercial and Islamic banks, excluding foreign offshore units, amounting to $56 billion in 2001, or over 700 percent of GDP. Deposits in those banks totaled $42 billion, equivalent to 540 percent of GDP during the same period.
In terms of market share, assets of Saudi banks amounted to $123 billion in 2001, representing about the 40 percent of total Gulf banks’ assets, followed by the UAE with about 57 billion in assets, or about 18.35 percent of total assets of local GCC banks. Similarly, Saudi banks attracted over $102 billion in deposits in 2001, equivalent to 41 percent of total deposits in Gulf banks, while the UAE and Bahrain were in second and third place with 23.3 percent and 17 percent, respectively. Furthermore, local commercial Saudi banks accounted for 35.6 percent of total shareholders’ equity in 2001, while UAE banks were in second place with 23.6 percent of total equity in GCC banks.
In terms of performance, return on equity (ROE) for the 62 GCC-based commercial and Islamic banks averaged at 14.48 percent in 2001, slightly down from 14.68 percent in 2000. However, among GCC countries, ROE varied widely with that for Saudi banks averaging at 20.04 percent in 2001, while Bahraini-based commercial and Islamic banks recorded a much lower ROE at 5.86 percent during the same period.
Return on assets (ROA) of GCC banks averaged at 1.68 percent in 2001, with Saudi banks significantly higher at 2.08 percent, indicating higher profitability relative to other Gulf banks.
While there are 62 GCC-based commercial and Islamic banks operating in the Gulf region, it is interesting to note that the top-10 GCC banks account for 54 percent of total assets in the Gulf area, implying a high concentration of loans and deposits within these banks.
Furthermore, the top-10 Gulf banks generated over 57 percent of total profits in 2001, while they held 51 percent of deposits and made up 48 percent of total loans advanced in the region. There were 8,129 local commercial banks operating in the United States in 2001, with a total asset base of $6,492 billion.
In addition, the share of bank assets held by the 10 largest US commercial banks amounted to 40 percent during the same period. This implies a higher concentration of banking activity among larger GCC banks which dominate market share.
Furthermore, GCC banks play a greater role in the economies of Gulf states, as capital markets in the region remain constrained due to the lack of transparency, limited foreign participation and the lack of rating agencies. In addition, with the corporate bonds market virtually non-existent in the region, funds that would have been otherwise channeled into equity and bond markets have accumulated in bank deposits. Consequently, bank deposits in GCC countries make up 54 percent of the region’s financial sector, while stock market capitalization comprises the remainder 46 percent. However, when compared to the more developed US financial sector, bank deposits amount to only 25 percent, while stock market capitalization amounts to 75 percent of the sector.
With the gradual opening up of Gulf economies, local banks need to position themselves and align their activities with those in more developed countries in order to ensure their continued profitability. This could be accomplished by mergers among Gulf banks both within and across GCC countries. By increasing their capital base, such mergers would enable Gulf banks to meet the growing industrial and infrastructure financing requirements of GCC economies.
(Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah)