Crisis managed

10 September 1999
SPECIAL REPORT BANKING

After the painful experiences of last year, Gulf banks have performed well in 1999. Profits are up and are expected to rise further in the second half of the year. However, the promise of much-needed consolidation within the sector has yet to be delivered. Tom Everett-Heath reports

This time last year international financial markets were in the midst of crisis. Russia had just defaulted and massive cross-border capital movements were wreaking havoc on emerging markets. Although the Gulf was seen as a safe haven, the crisis still had an impact: international financial turmoil and persistently low oil prices took their toll on balance sheets and income streams alike.

First-half 1999 financial results published by a number of Gulf banks show that there is greater reason for the region's bankers to be confident now than at any time over the last 12 months. Aggregate profits of the 33 banks covered in the survey - with one exception, none of the banks domiciled in the UAE publish interims - were up more than 7 per cent on the same period of last year. This would be healthy growth in any circumstances, but in the context of recent traumas these performances bode well. The first half of last year was itself a growth period for the region's banks and, if crisis is avoided for the next four months, all the signs point towards record profits being posted for 1999.

All but two of the 10 largest banks in the survey have seen significant earnings growth, with Arab Banking Corporation (ABC), Riyad Bank, National Bank of Kuwait (NBK) and Saudi American Bank (Samba) leading the way.

The fluctuations in the oil price over the last 12 months have been a major determinant of the health of the Gulf's banks. Falling demand for energy in Asia contributed to a sharp decline in oil prices. All the leading Gulf economies contracted and there was increased loan demand as well as growing government pressure for financing. Fears that the low oil prices would continue led most banks to worry about deteriorating asset quality, and levels of provisioning were hiked dramatically. In addition, there was a more aggressive approach to cost control, and with most of the region's banks lightly leveraged there was plenty of room for manoeuvre.

The strengthening of oil prices, which began in March, prevented a potential crisis becoming a reality. In fact, many banks benefited from increased lending opportunities without experiencing any significant rise in the levels of delinquent loans. The heavy provisioning of 1998, efficient cost-control and a more stringent approach to lending seem to have proved good preparation for strong performances this year.

The numbers tell a story. In full-year 1998, the levels of loans and advances grew by more than 15 per cent, the annual MEED survey of 61 of the Gulf's banks showed, while customer deposits grew by less than 5 per cent. In the first-half of 1999, loans and advances grew by less than 3 per cent and customer deposits were up almost 4 per cent. It appears that the downturn in the price of oil, and in Gulf economic activity, was long enough to boost loan demand in the region, but short enough to prevent any serious deterioration of credit quality. However, analysts warn that caution is still necessary.

Concerns over liquidity, which were heightened in the second half of last year, have also eased, as the appetite for sizeable project finance deals shows. Some of the region's banks have been active in the loan market themselves, with Emirates Bank International, Commercial Bank of Kuwait and National Bank of Fujairah among those taking significant facilities. Analysts say that with the worst of the summer heat now passing and bankers returning from holiday, a number of other deals are likely in the coming weeks. It is understood that Bahrain International Bank and Bahrain Middle East Bank are considering large facilities. Although the emerging market crisis seems to have ended, international banks have revised their attitude to Middle East risk, and while an appetite is returning, loan pricing is higher than it was.

Consolidation of the region's banks has not made any advances over the last three months. The anticipation which followed the mergers of Samba and United Saudi Bank in June, and Gulf International Bank (GIB) and Saudi International Bank in late April, has been disappointed. In particular, speculation over impending mergers in the UAE has so far come to naught.

However, the efforts of some of the regional banks to extend their operations have continued. GIB has been issued an operating licence for a branch in Saudi Arabia - the first licence to be granted to a non-Saudi bank - and says the branch will open in Riyadh next February. GIB officials say that plans have been made for the Riyadh outlet to be the first of a series in the major Saudi cities.

ABC's programme to establish a network of operations across the Arab world has had mixed fortunes in recent weeks. ABC chief banking officer Taher Makkiyah told MEED in mid-August that a wholly-owned subsidiary, ABC Tunisia, will be operational before the end of the year. ABC has plans for further expansion, targeting Egypt, Lebanon and the UAE as the most promising areas for growth. However, initial attempts to enter the Egyptian market through acquisition were dashed in late August when its bid for a 93 per cent stake in Egypt Arab African Bank (EAAB) proved unsuccessful. NBK, which was also bidding to enter Egypt, was equally disappointed that the local United Bank of Egypt won the auction.

Bankers say that with the process of globalisation accelerating, and with vast international banks created by high-profile mergers, the pressure for consolidation within the region continues to mount. At the moment, it is more a question of when, rather than if, this is going to happen.

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