AFTER a strong performance in 1995, the Middle East’s banks may be in for another good year. First-quarter results from a dozen banks in the Gulf indicate that business is developing well, with many reporting higher profits than last year.
In Saudi Arabia, most banks have notched up profits in the first three months of 1996 which are much higher than for the same period in 1995. The two highest scorers so far are Saudi Hollandi Bank and Al-Rajhi Banking and Investment Corporation, both of which recorded net profits up 28 per cent. Al-Rajhi, which operates on Sharia principles, is currently the Middle East’s most profitable bank. So far only Saudi-American Bank has reported lower first-quarter profits, though the Citibank affiliate’s net income only slipped by 1 per cent.
‘The (Saudi) banks are positioned to expand their loan portfolios. They are highly liquid and looking in 1996 for a rebound in the economy,’ says Andrew Beikos, Saudi analyst at Cyprus-based credit ratings agency Capital Intelligence. He notes that the government’s payment of obligations to contractors and farmers has added liquidity to the banking system.
Many banks are looking to the retail sector for growth in 1996, though this may also create a need for higher provisions against doubtful loans. ‘I think we’ll have to watch how the banks handle their portfolios and I believe they will increase positions,’ says Beikos. ‘Those banks that are not just diving into the retail sector are likely to be more successful.’
Bahraini banks have also produced some good first-quarter results. Bank of Bahrain and Kuwait and National Bank of Bahrain both recorded net profits more than 70 per cent higher than in the first quarter of 1995.It remains to be seen if this picture is repeated around the region.
The Gulf economies, in particular, received an unexpected windfall when higher oil prices, stimulated by a cold winter in the northern hemisphere, stayed firm throughout the first quarter. Prices have remained strong so far, confounding for the moment some of the gloomier predictions of sharp falls which have been made in recent months. The Gulf states have budgeted a conservative $14 a barrel for the year, several dollars below current prices, which indicates that government spending is unlikely to be disrupted by any future price volatility.
‘The banking environment (in the Gulf) is very healthy. The banks are liquid and have an appetite to lend and there is demand for loans,’ says Mohannad AlFarouky, assistant general manager at Gulf International Bank. ‘Margins have come under pressure, but they’re still very healthy. Banks should have a good 1996.’
One of the Middle East’s biggest banking dramas, the saga of the Bank of Credit and Commerce International (BCCI), passed a major milestone in May. Abu Dhabi, the majority shareholder in BCCI, signed an $1,800 million compensation agreement with the bank’s liquidators.
The agreement, held up by years of legal tangles, means that BCCI’s thousands of creditors around the world may now be coming close to getting some of their money back. It also means that Union National Bank, a domestic bank in the UAE which was 40 per cent owned by BCCI, will now be able to publish its accounts for the first time since BCCI was shut down in 1991. Abu Dhabi is taking over BCCI’s shareholding.
Changes of ownership are a common theme in several recent banking events. In May the French Suez group decided to sell a controlling stake in Banque Indosuez to French mutual bank Credit Agricole. Indosuez is a big player in the Middle East with equity stakes in banks in Saudi Arabia and Lebanon as well as its own network of branches and representative offices in the Gulf.
The deal, which was prompted by the Suez group’s own financial problems, will give Credit Agricole full ownership of Indosuez by the year 2000. At the time of writing it was not clear what the implications of the sale might be in the Middle East Credit Agricole is primarily a French domestic bank and dramatic changes in strategy at Indosuez do not appear likely, at least in the short term.
Another significant change in shareholding has taken place at the former UBAF Bank, an Arab-European consortium bank which was renamed British-Arab Commercial Bank earlier this year. The giant HSBC Holdings group, one of the founders of the bank, now controls 46.5 per cent of the institution after buying out UBIC Nederland – the holding company set up by the original shareholders in the UBAF Group — and acquiring a chunk of stock from Libyan Arab Foreign Bank. The Libyan bank still retains a quarter of the equity of BACB, which says the name change is intended to reinforce its identity as a British-based institution with Arab shareholders.
One small product of the consortium banking era is about to disappear from the scene forever – Saudi-Swiss Bank, which was set up in the 1970s to finance trade between Switzerland and the Gulf. Riyad Bank, one of the joint venture’s founders, decided that it preferred to be directly represented in Europe and has sold its stake to partner Union Bank of Switzerland (UBS). UBS now plans to dissolve Saudi-Swiss Bank and absorb its staff.
One area of Middle Eastern banking which is seeing energetic activity at the moment is the Islamic sector. Several major conventional banks with a presence in the Gulf, including Citibank and ABN-AMRO as well as Arab Banking Corporation. are consolidating their Islamic banking business into new subsidiaries. The year has also seen a plethora of new Islamic investment funds, most of them targeting equities (see page 39).
‘On the liability side, a lot of products have already been developed. The next stage of development, which we’re starting to see now, is in the (financial) services area,’ says Saleh Malaika, who heads the Saudi Dallah Albaraka Group’s financial businesses.
Dallah Albaraka and the Geneva-based Dar Al-Maal Al-Islami Group (DMI), which both control worldwide networks of Islamic banks, have been through restructuring processes in recent months. Dallah Albaraka has gathered together its diverse interests in banking and insurance into one division run by Malaika, which is applying for a banking licence in Bahrain.
The primary reason for the move may be that the group has simply become too large to run through a very centralised management structure: it controls 300-odd companies in a wide range of sectors and the financial sector alone covers about 50 institutions worldwide. Dallah Albaraka’s chairman and founder Saleh Kamel has indicated to MEED that the restructuring involves some devolution of responsibilities from senior management.
DMI’s ongoing restructuring is intended to help it build up its Islamic financial services. The changes appear to be prompted at least in part by increasing competition in the Islamic banking market.
The group’s chief executive Omar Ali said in March that the expansion of conventional banks in the sector meant that many Islamic institutions would have to restructure, though more recently he qualified this by telling MEED that he saw the march of the non-Islamic banks as creating ‘competitive space’ from which DMI could benefit.
In Egypt the privatisation process has picked up momentum and a prominent theme in Egyptian banking in recent months has been one of ownership changes at banks partly owned by the state. The four state-owned commercial banks have until the end of the year to sell off their stakes in joint ventures with the private sector. However, sales of shares in the four banks themselves, which dominate the Egyptian market, do not seem likely this year.
After campaigning by foreign banks, the government is changing the law to allow foreign majority ownership of joint venture banks. Barclays Bank and Banque Nationale de Paris, which are both partners in the state-owned Banque du Caire, are likely to take advantage of the new rules to buy a larger chunk of their Egyptian joint ventures. Egyptian American Bank (EAB) is raising its capital through a public offering to dilute the holding of the state-owned Bank of Alexandria. The foreign minority shareholder in this case is American Express Bank.
Egyptian banks are starting to explore new fund-raising possibilities. In May, EAB announced that it was launching a $200 million issue of five-year bonds, following the success of a similar bond issue by Citibank in Egypt earlier in the year.
Commercial International Bank (CIB) is moving ahead with its issue of global depositary receipts, becoming the third Middle Eastern bank to do so after Banque Audi of Lebanon and Banque Marocaine du Commerce Exterieur. National Bank of Egypt. which owns a chunk of CIB, is diluting its shareholding through the GDR issue, which is expected to raise $80 million to $100 million from international investors.
All three of the banks that have taken the GDR route are prominent institutions in their own domestic markets. It remains to be seen how many banks will try to follow them – there have been rumours of at least one possible GDR offering this year from an institution in a Mediterranean state.