AMMAN, 29 September 2003 — The prospects of the war on Iraq failed to dim the profitability of the major Arab banks and many recorded higher returns last year and the first half this year. Unlike other regions of the world where mergers between financial institutions can lead to major shifts, 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.
According to the Banker magazine, not much changes have been recorded in the listing of the top banks compared to the year before. Although the number of Arab banks in the top 1000 banks worldwide has increased from 84 in 2000 to 86 in 2002, 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 $28.5 billion amounts to only 1.47 percent of the combined total capital of the top 1,000 banks. The National Commercial Bank (NCB) maintained its position as the largest Arab bank in terms of Tier One capital of $2.381 billion, compared to $2.275 in 2001. The largest bank in the world Citigroup had a capital of $58 billion in 2002, or more than the combined capital of the largest 86 Arab banks.
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 (Arab Banking Corporation, Gulf International Bank and Investcorp). The only three non-Gulf Arab banks included in the top 20 were Arab Bank of Jordan, National Bank of Egypt and Al Ahli United Bank of Bahrain.
For most of the Middle East, 2002 was a reasonably good year and the same trend continued for the first half of 2003. The drop in local interest rates, in line with dollar rates, and rising asset base contributed to wider margins and higher profitability of the banks. In the Gulf, Saudi banks led the way with aggregate returns on average capital of 19.76 percent in 2002, up 18.8 percent on the year before. Saudi banks remained ahead of the Kuwaiti and UAE banks, whose average profitability did not increase from the year before at 17.62 percent and 13.35 percent. In Bahrain, reduced profits at ABC and Investcorp caused profitability to fall to 3.14 percent. The National Commercial Bank was the top performer among the large Arab banks with a strong 27.9 percent return on equity, followed by the National Bank of Kuwait at 25.7 percent.
Most of the Jordanian banks did well last year, even though profits at Arab Bank, which is ranked as number 5 in the region in terms of capital, ended the year lower at $294 billion compared to $312 million in 2001. The Housing Bank, Jordan Kuwait Bank, Jordan Islamic Bank, Union Bank, Arab Banking Corporation, Arab Jordan Investment Bank and Export & Finance Bank all recorded higher profits on the year before. Those banks that have significant exposures in Palestine, such as Cairo Amman Bank, where it has become almost impossible to sustain viable banking operations suffered because of the situation. Three Jordanian banks were adversely impacted by the crisis involving the granting of doubtful credit facilities to a Jordanian businessman, which was uncovered in February 2002.
Public-sector banks in Egypt are finally being restructured. The early experiment at Banque du Caire, where bankers with Western experience were drawn upon to bring a new professionalism to operations and resolve past problems, is being repeated at the other three large institutions. Experience at Banque du Caire suggests that it will not be rapid change, but the government has given new managements three years to solve the problems. Although this could be an overly optimistic time-scale, there is an enthusiasm for change that could bring results. In the interim, minimal growth and pressure on profits is to be expected at these banks and this could mean that the private-sector banks are likely to benefit.
The biggest problems in the region were seen in the Bahraini offshore sector, where the leading banks were hit by the poor performance of the global capital markets and by the near collapse of the private-equity market. Some banks also had a sizable exposure to one or more of the big corporate failures in the US and Europe. Two smaller banks, Bahrain International Bank and BMB Investment Bank, are fighting for survival and need to persuade their medium-term lenders to take losses and restructure facilities.
The combined pretax profits of the of the largest 20 Arab banks dropped by 4.6 percent to $4,693 million in 2002. The highest pretax profits for the second year in a row were recorded by the National Commercial Bank at $650 million. The bank has engineered an impressive turn around and has now firmly positioned itself as the most profitable bank in the region, besides being the largest Arab bank in terms of equity. The second highest profits were recorded by the Saudi American Bank at $496 million, followed by Riyad Bank at $378 million, Al-Rajhi Banking at $377 million, and the National Bank of Kuwait at $376 million. Among the non-GCC banks, the Arab Bank recorded the highest profits at $294 million. The largest Arab bank in terms of equity was NCB with Tier One capital of $2.38 billion, followed by the Saudi American Bank with $2.34 billion. NCB has a world ranking of 151, 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 2002, 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.
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 in 2002 is put at 19 percent, among the highest in the world compared to the overall capital/asset ratio for the top 1000 of 5 percent. The ratio is at 10 percent in the US, 14 percent in Latin America, 14.9 percent in the EU and 12.4 percent in Asia.
Return on assets ratio for the top banks across the Arab countries in 2002 ranged from a low of 0.05 percent for Arab Banking Corporation to a high of 2.43 percent for the Saudi American Bank. The other top three Arab banks in terms of return on assets were Al Rajhi Banking & Investment (2.39 percent), the National Commercial Bank (2.28 percent) and Banque Saudi Fransi (2.27 percent).
Judging by mid 2003 results, the profitability of Arab banks is likely to be higher this year. The banking sector continues to benefit from strong economic growth prospects, supported by higher oil prices and a general improvement in regional risk following the end of the war on Iraq. 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.
— (Henry T. Azzam is chief executive officer at Jordinvest.)
