Arab Banking Corporation switches focus to retail

31 October 2008
Arab Banking Corporation revises business model in the wake of the turmoil in global financial markets.

Bahrain-based Arab Banking Corporation (ABC), one of the largest regional investment banks, with assets of $32.7bn, is to switch its focus from investment banking to retail banking as a result of the global financial market turmoil.

The bank, which was set up by regional governments in 1980, says it is seeking to acquire banks in the GCC and will invest $300m in developing its retail network across North Africa.

Assets under management$32.7bn
Capital injection from shareholders on 30 April$1bn
Total exposure to sub-primerelated assets in 2008$740m
Proposed investment in North Africa retail network$300m
Retail branches to open in Egypt, Jordan, Algeria and Tunisia120

The moves come in the wake of the collapse of major US institutions such as Lehman Brothers, which has prompted banks such as Merrill Lynch and Goldman Sachs to change their strategies.

“The pure investment banking model is now defunct,” says Hassan Ali Juma, chief executive officer and president of ABC. “Financial institutions will have to transform [themselves] into something more sustainable.”

The revised strategy will involve opening up to 120 retail branches in Egypt, Jordan, Algeria and Tunisia over the next 12 months, while also pursuing acquisition opportunities across the GCC, to take advantage of lower valuations due to the credit crunch.

The bank is prohibited from pursuing retail expansion in the GCC because it does not have retail licences in those markets, although it is seeking authorisation to open a branch in the UAE.

The bank is hoping its shareholders - the Central Bank of Libya, the Kuwait Investment Authority (KIA) and the Abu Dhabi Investment Authority (Adia) - will open doors to potential acquisitions in the GCC.

“Our focus will be on the larger economies - the UAE, Saudi Arabia and Kuwait,” says Juma. “Funding [for an acquisition] will be forthcoming if the proper target presents itself. Our board, which is representative of our shareholders, has indicated that funding will be forthcoming.”

ABC is headquartered in Bahrain, but Juma says it is not planning to apply for a retail banking licence in the kingdom. “We are not even considering applying for a retail licence in Bahrain and I do not think the central bank would grant it,” he says. “If we had a licence we would establish a branch in Bahrain, but Bahrain is already over-banked.”

After working on the strategy with US management consultant McKinsey & Company over the past four months, ABC is expected to officially announce the change of direction at the time of the release of its third-quarter results in the coming weeks.

Juma says the third-quarter results will draw a line under the bank’s losses associated with subprime-related assets such as collateralised debt obligations (CDOs) and structured investment vehicles (SIVs).

“By the end of June, we completely provided for CDO and SIV exposure,” says Juma. “This meant provision of $740m in 2008. We have exposure to Lehman Brothers and will fully provide for that in the third quarter. Even after this, ABC will remain well capitalised.”

The bank announced a $1bn cap-ital injection on 30 April to cover its sub-prime losses. The shareholders had agreed to increase its issued and paid-up capital to $2bn from $1bn at an extraordinary general meeting a day earlier, through a priority rights offering to existing shareholders.

At the time, Juma said the capital injection would bolster the bank’s liquidity, mitigate its market-related exposures and strengthen its future earnings growth.

Once the third-quarter results are released, Juma says the bank will be able to concentrate on its retail strategy. This relies on being able to access the more stable and cheaper retail deposits as a funding source, rather than having to rely on funding from capital markets.

“The global direction now is to revisit that [investment banking] business model,” says Juma. “If Goldman Sachs has done it, then everyone will have to.”

The bank aims to generate 25 per cent of revenue from its retail arm by 2011, up from 3-5 per cent. It currently has just a handful of retail branches in North Africa.

Traditionally regarded in the region as a project finance bank, ABC expects to continue working in the sector, but will concentrate its investment banking work on sectors and companies where it can win ancillary work, such as taking corporate deposits.

Juma says he also wants the bank to restructure its balance sheet, which includes an $11bn securities portfolio of mainly collateralised mortgage obligations guaranteed by US mortgage lenders including Fannie Mae and Freddie Mac, which were nationalised by the US government in September. “There is a negative fair value amount [from these securities] but it is not substantial,” says Juma. “There is no profit or loss implication.”

ABC is one of the last remaining pan-regional institutions formed out of the 1970s oil boom.

Its decision to move into retail banking will also raise questions for Bahrain-based Gulf International Bank (GIB), which has also suffered losses from exposure to sub-prime-related assets, and has been the subject of market speculation about its future.

Media reports in mid-October suggested GIB could be an acquisition target for a Saudi bank. This prompted its management to send an email to all staff insisting the bank would remain independent.

GIB has yet to reveal how it plans to adapt to the new financial environment.

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