LONDON, 22 July — The banking community in the Gulf Cooperation Council (GCC) states generally enjoyed another successful year in 2001. And while first quarter 2002 results were once again encouraging, there are some concerns that financial institutions in the region will find it difficult to sustain this for the full year 2002 especially in a continuing low global interest rate environment; slow economic recovery especially in the US, exacerbated by more revelations of corporate accounting failures and subsequent new regulatory measures proposed by the US Congress; and in general the lack of competitiveness and transparency of Gulf institutions relative to their Western peer counterparts.
There are of course occasionally certain caveats to consider relating to the performance of individual banks. The financials of a bank, for instance, may be boosted due to increase in earnings from a one-off capital gains. On the other side of the balance sheet, a bank may make an extraordinary one-off provision to write-off its non performing loans (NPLs). Banks could also make provisions for bad debts such as the ones made by Arab Banking Corporation (ABC) and Al-Rajhi Banking and Investment Corporation (ARABIC) to cover their exposure to the collapsed US energy giant, Enron Corporation.
The latest Euromoney Awards for Excellence 2002 published in July, indeed, should make difficult reading for the Arab and Gulf banking community. In the regional Middle East category, only one Arab or Gulf bank could hold its own in the seven categories. National Bank of Kuwait was judged to be the best bank in the region. The best debt house was Merrill Lynch; the best equity house, UBS Warburg; the best M&A (mergers and acquisitions) house was Deutsche Bank; the best bank for custody was Citigroup, which was also judged to be the best for risk management and treasury operations; and the best house for cash management was HSBC.
On the face of it, comparing the smaller Gulf and Arab banks with these Western global giants may seem unfair. But this is precisely the point. As one British banker puts it, Gulf banking should at least be able to compete on its home patch. It cannot leverage on the advantages of home market, business culture, networking, and local knowledge, then it is going to be in for a rough ride, especially as the future of banking and financial services like other sectors of the economy learn to cope with the unstoppable onslaught of globalization.
The signs are already there – the emergence of a few large global banks, and the growth of regional banks and national banks. The latter must realize that competing on the international stage is too much for them unless they compete on particular niches in the market where they have particular expertise — a point to which I shall allude to later.
"The idea of setting up branches in New York and London if you are a Gulf bank for instance, is not necessarily the right thing to do. Concentrate on your home market and leave the international banks to do the international business," stresses Andrew Buxton, Senior Adviser to Britain’s Barclays Bank.
Gulf banking, he suggests, has missed the opportunity to really develop one or two strong international banks. As such, the emphasis should now be on more consolidation, possibly through mergers.
"The regulatory authorities ought to be pushing banks to consolidate. It is one of the disappointments to me, knowing the region well, that there is really no strong international bank in the Gulf. There are some good regional banks such as GIB or SAMBA. The opportunity now has been missed. I don’t think that a bank that can compete on a wider stage than that will emerge in the Gulf. You can’t create these institutions.
They come about partly through consolidation and partly through skill. They have emerged mainly in Europe and the US. There are some Japanese banks that compete on a world stage. They are not strong because of bad debts and lack of capital. They compete for lending and not very much at the skill level," he contends.
However, can Gulf institutions compete on the international market in particular niches where they may have a special expertise? The obvious niche would be Islamic banking and finance. The truth is that the global banks even here have made enormous strides not only in managing the surplus liquidity of Islamic banking but also in product innovation. Take for instance, the $600 million Malaysia Global Sukook Inc., the first Islamic global bond to be launched by a sovereign — Malaysia in this respect in June.
The lead manager and bookrunner of the issue which was well-oversubscribed, was not an Islamic banking group or a major banking group from a Muslim country, but HSBC.
HSBC’s Islamic division, the Dubai-based HSBC Amanah Finance, headed by Iqbal Khan, advised and helped to structure the five-year floating rate deal, which was rated Baa2 by Moody’s and BBB by Standard & Poor’s.
HSBC in fact appointed a number of co-managers to market the issue in the Gulf states. These included ABC Islamic Bank, Abu Dhabi Islamic Bank, Dubai Islamic Bank, the Islamic Development Bank. In Asia, one of the co-managers was Bank Islam Malaysia.
The fact that 51 percent of the bond was subscribed by Gulf institutions and accounts, despite the fact that Middle East investors had never participated in a US dollar global issue before and had very little or no experience of Malaysian credit and risk, may be a reflection of the potentially huge appetite for such papers, or of the novelty of such an issue given its tight pricing of 95 basis points over US LIBOR. But would any Islamic bank or regional bank have been capable of lead managing and acting as sole bookrunner for such a sovereign issue? It may be true that many cards are stacked against the banks from the emerging world in such respects, especially in their dealings with governments and with rating agencies. But regional and national banks, including from the Gulf, need to demonstrate that there are capable of leveraging opportunities not only in their home markets but also in the areas in which they are supposed to have a niche expertise.
However, another Euromoney ranking survey — this time on standards of corporate governance, showed another trend, albeit general, for Gulf corporates. Of 183 "of the biggest corporations in the emerging markets" ranked, only two from the Arab world — two Jordanian banks, were ranked. Whilst one of the Jordanian banks came joint 23rd, the other came joint 180th.
Although, I fail to see how both these banks could qualify as two "of the biggest corporations in the emerging markets", especially in terms of size of balance sheet.
