ARAB Banking Corporation (ABC) is pausing for thought. Two-and-a-half years after the departure of its founder Abdullah Saudi, the Arab world's biggest bank has hired a consultant to review businesses that range from trade finance in the Gulf to retail banking in Spain and Hong Kong. The exercise, which comes as Saudi's successor gives way to a new chief executive, will help ABC to consider which direction to take in a global banking market that is becoming steadily more competitive.

ABC was created in 1980, at a time when the Middle East was awash with money. Its founder shareholders were Libya, Kuwait and Abu Dhabi, though 25 per cent of its equity has been owned by private investors since a capital increase in 1990. 'We set out to create a bank which is among the top 100, one which would be able to depend on its own resources,' Saudi told MEED the year the bank was founded.

That was before the Third World debt crisis, the collapse in oil prices in 1986 and the Iraqi invasion of Kuwait in 1990. With assets of around $21,000 million, ABC is still one of the premier banks in the Arab world. Yet by international standards it is small. 'ABC is widely spread around the world, but it isn't really big enough to become a market leader in any one area,' observes a Gulf-based investment banker.

What ABC has achieved is to build a strong reputation in what has become its core activity, financing trade between Arab countries and the rest of the world. Expansion in the 1980s has given it a network of branches and representative offices across three continents: most are in the Arab countries or the West, apart from a branch in Singapore and an office in Hong Kong. It also controls retail banks in Spain, Hong Kong, and Jordan, trade finance banks in the UK and Germany, a private bank in Monaco and an investment banking subsidiary in Bahrain, which itself controls a brokerage house and two Islamic finance companies. Through affiliates, ABC has a presence in parts of Latin America and Southeast Asia (see table).

1990 was a bad year for ABC, and it made a loss of $91 million. Since then, analysts say, performance and asset quality have improved. The net profit for 1995 was $116 million. ABC's 0.55 per cent consolidated return on end-year assets in 1995 remains low by the standards of Gulf banks, though this figure disguises the wide disparities between the different parts of the group. The banks in Hong Kong and Jordan are strong performers, as is the investment banking unit, but some of the European subsidiaries earn far less from their assets.

'When ABC was established, the [Middle East] region was a net exporter of surplus funds. Now it is a net importer. When I arrived, the first question I asked myself was, is ABC's raison d'etre the same?' says current chief executive Ahmed Abdullatif.

Abdullatif, a former deputy governor of Saudi Arabia's central bank and previously managing director of Riyad Bank, came to ABC in early 1995, after the resignation of Abdullah Saudi. As a Libyan national, Saudi was under pressure from the US government to step down as it intensified its international campaign against Libya, for its alleged sponsorship of terrorism. Saudi appears to have been faced with the choice of leaving ABC or facing action against the bank by the US Office for Foreign Asset Control (OFAC).

Libyan issue

The Libyan issue still hangs over ABC. MEED understands that ABC and OFAC are still discussing the bank's Libyan connections. Libya retains 20 per cent of ABC, while the remaining 13 per cent owned by Libyan interests is held in trust by the Bahrain Monetary Agency. There are two Libyan nationals on the 12-member board of directors. If it were thought desirable, the Libyan shareholding could presumably be reduced further - by a capital increase or a buyout - though there are no indications that either option is likely in the near future.

Abdullatif himself is leaving in early 1997. He will be replaced by Ghazi Abdul-Jawad, who is currently general manager of the other big wholesale bank based in Bahrain, Gulf International Bank (GIB - see box).

Asked why he and ABC are parting company, Abdullatif says only that he intends to return to business and personal commitments in Saudi Arabia. The perception among bankers and analysts is that he was brought in after Saudi's departure to keep ABC running smoothly in a period of uncertainty. As a prominent Saudi Arabian banker, he would also be acceptable to the US as a replacement for its Libyan founder. 'I think he was seen as a safe pair of hands,' says one analyst.

During his time at the bank, Abdullatif carried out an in-house review of its strategy. Consultants Arthur Andersen have been brought in to give a second opinion on the bank's own conclusions, he says, and will report in mid-1997. The in-house review covered 'integration, synergies, balance- sheet structure and expansion, which includes geographical expansion and going into markets which we think offer higher potential.'

Abdullatif also set internal rules for compliance with UN sanctions on Libya, while attempting to develop ABC's Libyan business within UN restrictions. The bank deals less with Libya than it used to, he says. 'The Libyan business was very important to ABC and we'd love to have it back, within legitimate frontiers. But we're doing extremely little, because we don't want to give any party the chance to misinterpret our actions.'

Believing that ABC should build up its capital base to hold its own in an era of bigger and bigger banks, he recommended in 1995 that no dividend should be paid for the year. None was paid: the shareholders appear to have accepted this reasoning. Abdullatif says net profits for 1996 are likely to be at least equal to last year's $116 million.

There is, however, a feeling in some quarters that now might be an appropriate time for Abdullatif's conservative approach to managing the bank to give way to a different one. Abdul-Jawad is widely seen as a good choice as the new chief executive because he has spent 10 years at GIB, a bank which has many similarities with ABC (see box). He says that his new job will be a challenge, but he is looking forward to it.

Armed with the conclusions of the strategy review, there are a number of issues that ABC may consider. One is the question of whether the group should keep its worldwide network in its present form or attempt to rationalise it. ABC began to consolidate its diffuse structure in the early 1990s when it reorganised itself into three regional divisions, one for Western Europe and America, one for the Arab world and one for the rest of Asia.

Before Saudi's departure, the intention was that these three divisions should eventually become three separate banking units overseen by a holding company in Bahrain. ABC International Bank, which is based in London, was set up with the idea that it would absorb ABC's operations in the OECD countries. This has not happened, and ABC's presence in Europe and the US is split between four branches, three offices and a host of subsidiaries - several of them are banks in their own right.

There may well be efficiency savings and tax advantages to be found in consolidating ABC's operations in this way, and possibly in looking at how well different parts of the group work together.

However, this also raises the question of whether ABC should hang onto all of the businesses it is presently involved in. 'They need to look at many of their subsidiaries and maybe close some of these outfits so they can concentrate on areas where they are strong,' says a London-based Arab banker.

'We are really open-minded [about the review],' says Abdullatif. Asked if the review might lead ABC to sell out of some of its less profitable businesses, Abdullatif says he has not prejudged the outcome. 'That's what we mean by open-minded. We are not taking any prior positions.'

Banco Atlantico of Spain and International Bank of Asia (IBA) in Hong Kong were acquired in the 1980s to provide ABC with a retail deposit base. They also helped the group to capture business related to trade between those regions and the Arab world, though analysts say there are relatively few synergies between the two retail institutions and their wholesale parent. While IBA is very profitable, Atlantico has performed poorly in recent years. 'Banco Atlantico is a medium-sized Spanish bank. It has to compete with major Spanish banks and it doesn't have a regional niche,' says Maria Jose Lockerbie, analyst at credit ratings agency IBCA.

Other Spanish banks have shown an interest in buying Atlantico because of its extensive branch network and Banco Exterior de Espana, which owns 24 per cent of the bank, is keen to sell. To date, ABC has been unwilling to lose control. 'At the time, Atlantico was a successful acquisition. They could probably sell with a handsome profit,' says the Arab banker.

ABC executives have been saying publicly since the start of the decade that the group needs to focus more on the Arab world and Asia, though the proportion of the bank's earning assets in the West - about half of the total - has changed little since 1989. The proportion of earning assets in Asia was about the same in 1989 and 1995, while those in the Arab world have actually fallen from 18 per cent to 10 per cent of the total. 'Our feeling is that ABC's presence in Europe and the Americas has come to a saturated point. Markets there are fiercely competitive and linkages are fewer. Other areas present greater potential,' says Abdullatif. ABC opened an office in Algiers in 1995 and another in Abu Dhabi this year - its first in the Gulf outside Bahrain.

The distribution of ABC's assets reflects the reality that the bulk of Arab trade is with the West. However, there might be more Asian-Arab trade business to capture if the Asian economies continue to grow at the current rapid rates. ABC can do so through its Singapore branch and through IBA and its affiliates in Thailand, the Philippines and Vietnam, though it currently has no direct representation in India or the Muslim countries of Southeast Asia. Expansion into mainland China is also a possibility for IBA.

ABC has already firmed up its presence in the growing Islamic market by sponsoring a new Islamic investment bank, based in Bahrain, in which it will be a minority shareholder. The Islamic Finance Corporation will be run by ABC under a management contract: it will focus on providing clearing services to Islamic banks, taking over two ABC vehicles which do this at the moment.

Future options

There are also balance-sheet issues to consider. ABC's profile is short term: at the end of last year 65 per cent of assets and 85 per cent of liabilities were of maturities of less than one year. Ratings agency Standard & Poor's (S&P) notes that the bank's dependence on short-term interbank funding can be a disadvantage in a region as potentially volatile as the Gulf, though ABC has few earning assets there and could relocate its operations outside the area at short notice if need be. S&P analyst John Chambers says the bank would do well to improve liquidity at the head-office level. It also has a sizeable Brady bond portfolio which is performing poorly.

Like other banks trying to maintain profitability in a crowded international market, ABC is moving away from spread lending towards fee-based income and 'relationship banking' - lending only to favoured clients who use other services provided by the bank. 'We are being very selective on syndications,' says Abdullatif. 'The days when you just get your name on a tombstone and move on are over.'

The orthodox view in banking circles is that the next few years will see the emergence of a small number of giant global institutions, able to do every kind of banking everywhere. Smaller banks will have to find a specialised niche. Abdullatif says ABC's potential niche is its Arab identity, and others agree that the bank could play a bigger role in its home region - in capital markets-related activity, for example. 'There is a need for a fully-blown regional merchant bank which provides the whole range of services. ABC could do that, though there is a feeling that they've been treading water recently,' says the Gulf investment banker.

Asked if he is sad to be leaving ABC at a time when the bank is in the throes of its self-examination, Abdullatif likens himself to a man who plants a crop and hands it over to another to tend - not an easy task for either man, he says. 'ABC has achieved a lot, meeting the requirements of the time. The question is how we can sustain that achievement.'