ABC: Staying focused on the Arab world

01 November 2002

MEED: How extensive is ABC's current cost-cutting exercise?

Ghazi Abdul-Jawad:It is prudent for management to ask itself questions and ponder the imponderable. If you are in a difficult financial year, such as 2002, you have to look for answers, and while there is no wholesale plan to lay off staff, at most banks staff-related costs are one of the biggest items. Banco Atlantico [of Spain] is the largest unit within the group and we are following a redundancy programme, which is part of a four-year re-engineering programme. This has already reflected positively on the bank's cost:income ratio. There has also been turmoil in Brazil. Our bank there [Banco ABC Brasil] has managed to shed 30 per cent of its staff, which is an intelligent response to market conditions. IBA [International Bank of Asia] has reduced its headcount since the 1997 Asian crisis branch closures that followed. ABC Securities (Egypt) has effectively been closed down, we have reduced its capital and are selling the assets in its inventory. More divestments are possible.

MEED:Are there plans for further regional expansion? Will ABC be seeking a Saudi licence, for example?

Abdul-Jawad:There are no acquisitions planned at present. ABC is still an offshore bank and all the recent licences issued by the Saudi authorities have been for national banks [Emirates Bank International, National Bank of Bahrain and National Bank of Kuwait]. We are not pursuing this path at the moment.

MEED:How difficult has this year been?

Abdul-Jawad:2002 has been a very bad year. There have been credit costs in the Hong Kong market and a change in bankruptcy laws there, which have hit us. There have also been market-related revaluations of the assets held by our subsidiary in Brazil: it held mostly Brazilian government paper. We took the decision to cease trading in US equities early this year, though if the market picks up we would want to be active for ourselves and our clients. However, the performance of our treasury operation here in Bahr ain has been phenomenal, particularly in the foreign exchange, options and securities markets. Overall profits will be down year-on-year.

MEED:What are the prospects for next year?

Abdul-Jawad:2003 has the potential to be another difficult year for banks. There is an economic slowdown in a number of the markets we operate in, combined with very low interest rates. Markets are not conducive for good trading in securities or equities. This, coupled with the increased costs of managing businesses, is going to hit many banks next year. There is still more pain to come. As you are seeing in the US and Europe, investment banks are paying for past excesses.

MEED:Is ABC continuing with its strategy of focusing on the Arab world?

Abdul-Jawad:When we developed that strategy a few years ago, the liability side of our balance sheet was Arab world-driven and we wanted to diversify our asset base in the Arab world. We have been able to sustain this. Many of the Arab markets we have entered, such as Algeria and Egypt, have been closed to new entrants and there have been entry costs, such as currency devaluation or bringing up staff quality. However, we will continue to focus our assets and our liabilities on the Arab world.

MEED:Will ABC continue to develop its strong position in the regional project finance market?

Abdul-Jawad:We are aiming to create stability of earnings and build annuity income from our project finance portfolio. There are issues with asset/liability tenor mismatches: my funding is short-term - there is no term funding in the region - though some of the other regional banks have the comfort of a lender of last resort. As a result I would prefer not to lend for more than 10 years, even though some project sponsors have sought 18-year-plus borrowings.

MEED:What has been the impact of concerns over regional security?

Abdul-Jawad:After 11 September and the demise of the Nasd aq and Dow Jones indexes, many foreign companies and banks have seen their capitalisation eroded and have moved to conserve capital or demand a higher price for it: they have become increasingly risk-adverse. The Middle East has historically been risk-prone and some international banks have repositioned into other markets. This process is continuing.

In the area of project finance, the number of players is reducing as some banks feel the risk-adjusted return on capital [RAROC] is poor. In terms of the impact of an armed conflict that is Iraq-specific, the floor of liquidity would suffer but it would be temporary, depending on what happens. We have been through regional crises before and are adept at crisis management.

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