Despite the regional uncertainty associated with the Israeli aggression against the Palestinian people and the repercussion of Sept. 11, the top 20 banks in the Arab region have remained remarkably stable last year and many recorded higher profitability.
Unlike other regions where mergers can reshape listings, the Middle East is significantly lacking in any mergers and acquisitions activity, largely for political and family reasons, and the fact that many large banks still have strong public sector ownership. The positions of the top banks are virtually unchanged from the year before, with the exception that the National Commercial Bank (NCB) of Saudi Arabia has regained its position as the largest Arab bank in terms of tier one capital. Although the number of Arab banks in the top 1,000 banks worldwide has increased from 84 in 2000 to 86 in 2001, the region’s banks represent small and relatively insignificant part of the global financial structure. The combined tier one capital of the top 20 Arab banks at $27 billion amounts to only 1.45 percent of the top 1,000 combined total capital and all 86 banks account for only 3 percent of the total. The largest bank in the world Citigroup, has a capital of $56 billion in 2001, or more than the combined capital of the largest 86 Arab banks of $55 billion. The second largest bank in the world in terms of capital is Bank of America at $42 billion, followed by Mizuho Financial Group of Japan at $41 billion and JP Morgan Chase at $38 billion.
Like last year, Saudi banks accounted for 7 of the top 20 Arab banks, followed by United Arab Emirates with 5 banks and the three major offshore banks of Bahrain (ABC, GIB and Investcorp). The only three non-Gulf Arab banks included in the top 20 were Arab Bank of Jordan, National Bank of Egypt and Commercial Bank of Syria.
For most of the Middle East, 2001 was a reasonable year with the drop in local interest rates, and rising asset base contributing to wider margins and higher profitability of the banks. In the Gulf, Saudi banks led the way with aggregate returns on average capital of 18.8 percent, a very healthy result and slightly higher than the previous year of 18.3 percent. The Saudi American Bank was the top performer among the large Arab banks with a strong 26.8 percent return on equity, followed by Al Rajhi Banking and Investment Corp. with 23.4 percent. In Kuwait, the banks averaged 17.97 percent return on capital up from 16.2 percent in 2000, with National Bank of Kuwait maintaining its leading position at 26.5 percent. The UAE banks averaged 13.4 percent, slightly below the corresponding level of 2000 at 13.7 percent, led by National Bank of Abu Dhabi with 20.6 percent return on equity.
The combined pretax profits of the of the largest 20 Arab banks reached $4,693 million last year, 6.2 percent higher than in 2000. The highest pretax profits were recorded by the National Commercial Bank at $605 million, although most of these were operational profits excluding provisions, followed by the Saudi American bank at $601 million, Al-Rajhi Banking at $412 million, and the National Bank of Kuwait at $366 million. Among the non-GCC banks, the Arab Bank recorded the highest profits at $312 million. The largest Arab bank in terms of equity was NCB with tier one capital of $2,275 million, followed by the Saudi American bank with $2,243 million. NCB has a world ranking of 149, and only six Arab banks are ranked among the top world 200 banks by equity.
A regional comparison of the cost to income ratio, a standard benchmark of banking efficiency, reveals that the Middle East enjoyed the lowest ratio at 44.2 percent in 2001, compared to 74 percent in Japan, Latin America at 62.7 percent, EU at 58.9 percent, Asia at 57.6 percent and US at 60.4 percent. The lowest cost to income ratio in the region was that of the National Bank of Kuwait at 33 percent.
In looking at assets per employee, the US major banks, Citigroup, Bank of America and Bank One provide a figure of around $4 million per employee. While HSBC and Royal Bank of Scotland are not far away at $4.1 million and $4.9 million respectively, Deutsche Bank is double this figure at $8.5 million per employee and the big Swiss banks are in excess of $10 million per employee. The large Arab banks are not far away from these figures with assets per employee for the Arab Bank for example at around $5 million. No doubt conditions around the world differ, prompting different reasoning behind these ratios but in the coming period increased focus will be placed not only on cost/income ratios but also on various other indicators that might demonstrate improvements in efficiency and savings.
Across the Middle East region, capital-to-assets ratio are substantially higher than the norm elsewhere, reflecting capital strength and conservative asset growth. The average BIS ratio in the region is put at 19 percent, among the highest in the world compared to the overall capital/asset ratio for the top 1,000 of 4.62 percent. The ratio is at 9.27 percent in the US, 14 percent in Latin America, 14.9 percent in the EU and 12.4 percent in Asia. Qatar National Bank exhibited the highest average capital asset ratio of 42 percent, followed by National Bank of Dubai at 37.6 percent, and Housing Bank for Trade & Finance at 30.6 percent.
Return on assets ratio for the top banks across the Arab countries ranged from a low of 0.20 percent for Commercial Bank of Syria to a high of 2.98 percent for Al-Rajhi Banking & Investment Corp. of Saudi Arabia. The other top four Arab banks in terms of return on assets were the Saudi American Bank (2.91 percent), National Bank of Kuwait (2.52 percent), Emirates Bank International (2.38 percent) and Abu Dhabi Commercial Bank (2.35 percent).
Judging by mid year results, the profitability of Arab banks is Likely to be lower this year. Globally and domestically the banking industry continues to suffer from a low interest rate environment, economic slowdown and heightened instability in financial markets. To maintain profitability and maximize shareholders’ value, banks need to remain focused on diversifying their activities and managing risk prudently. This necessitates shedding off business where the returns do not cover cost of capital, and allocating more resources to those activities that add value over time. Enhanced profitability could also be achieved by reducing operating expenses through the effective use of modern technology such as the Internet, ATMs and phone banking. Arab banks need also to consolidate and form larger units in order to compete regionally and internationally.
(The author is chief executive officer at Jordinvest)
