From Rabat to Riyadh, almost all financial institutions across the region can face 2010 with renewed confidence. Over the past 18 months, as liquidity has dried up and business confidence has evaporated, the region’s banks have showed an enviable ability to survive in adverse circumstances.
With just a few exceptions, the region’s financial institutions have had little exposure to sub-prime assets and have largely avoided the defaults and takeovers in other, more mature markets.
“As far as the banking sector in general is concerned, the reality is that they have done very well,” says Jarmo Kotilaine, chief economist at NCB Capital, the investment banking subsidiary of Saudi Arabia’s National Commercial Bank. “Yes, they stopped lending for a while but there were no bank failures, and with remark-ably few exceptions, they have remained profitable.”
Yet the Middle East and North Africa region has not emerged unscathed from the global financial meltdown, and its effects are still being felt in many markets.
Two of the largest Kuwaiti finance houses – The Investment Dar and Global Investment House – were forced into debt restructuring this year, while Dubai banks in particular have been hit hard by the collapse in the emirate’s real estate market.
Banking & Finance
- $117.6bn – Saudi bank deposits held with central bank in September 2009
- 36 per cent – Increase in value of those deposits since start of the year
- $15.7bn – Amount owed to Gulf banks by Al-Gosaibi and Saad
|Bank lending in the region|
|Country||Proportion of loans that are non-performing (%)|
|Source: International Monetary Fund|
The announcement by the Dubai government in late November that it would ask its creditors for a ‘standstill’ agreement on the debts of the state-backed Dubai World conglomerate could yet lead to an even more serious downturn in the market.
Elsewhere in the region, banks are entering 2010 in a cautious frame of mind, particularly when it comes to making new loans. Instead of offering more credit to their customers, Saudi banks, for example, have been placing their money with the central bank, the Saudi Arabian Monetary Agency (Sama). The value of their deposits with Sama had grown to SR117.6bn at the end of September 2009, up from SR86.2bn at the start of the year.
“There is no liquidity shortage here,” says Robert Eid, chief executive officer (CEO) of Saudi Arabia’s Arab National Bank. “We have one big problem, which is surplus liquidity way above our needs.”
The scale of the financial crisis means that banks are now far more reluctant to offer credit than in the past. “Banks are awash with liquidity but are risk averse due to the global and regional impact of the slowdown,” says John Sfakianakis, chief economist at Banque Saudi Fransi.
However, that creates problems for the wider economy, with growth hampered by the lack of finance available to businesses.
In Saudi Arabia, the government has tried to address the issue. Sama is no longer issuing treasury bonds on behalf of the government, sending a clear message to local banks that they must start lending to the private sector.
The surplus liquidity is a problem many Western countries can only envy. “I would prefer to have a liquid banking sector than for banks to be asking for government credit lines and bailouts,” says Sfakianakis.
Other Gulf countries are trying to balance the need to boost lending to businesses with keeping banks’ balance sheets healthy. The Central Bank of the UAE, for example, has so far failed to ensure that UAE banks do not lend more than they have on deposit – the loan-to-deposit ratio of UAE banks was at 104 per cent at the end of September, above the 100 per cent level the authorities have demanded.
In all markets, some companies will find it harder to raise fresh finance from banks in the year ahead, particularly those that could previously rely on their reputations alone to ensure access to new lines of credit.
The problems of this policy of ‘name lending’, where banks offer credit to companies based on who they are rather than on a formal evaluation of risk, was brought into sharp relief by the defaults of two Saudi conglomerates – Saad Group and AH Al-Gosaibi & Brothers Company – in the first half of 2009. Banks in the region are estimated to be owed at least $15.7bn by the two groups.
“The Saad/Al-Gosaibi story has clearly created greater risk-aversion on the corporate lending side,” says Sfakianakis. “However, we tend to forget that banks became risk averse as of December 2008, not when the Saad/Al-Gosaibi story broke out in May.”
“There is no liquidity shortage. We have one big problem…surplus liquidity way above our needs”
Robert Eid, CEO, Arab National Bank
An increase in non-performing loans across the GCC is likely next year but, even so, bankers remain confident about the underlying economic conditions, not least because of high levels of government spending backed by the resurgent oil price – close to $75 a barrel for much of 2009.
“Government spending is unabated and the economic climate looks positive,” says Eid. “There is a pipeline of opportunities in the oil and gas, power and water, and infrastructure sectors. These are big projects and there are plenty of them.”
Project finance is one area of business that could profit from an increase in lending activity from 2010, on the back of this state-sponsored capital expenditure.
While some regional banks remain constrained by a lack of liquidity, there is a growing appetite from both international and regional banks for longer-term debt packages. “We have come of age now,” says Eid. “Maturities of 16-20 years are not a problem these days.”
Another trend that is likely to continue is the overseas expansion of the better capitalised Gulf banks. With most domestic markets already highly competitive, it makes sense for banks to expand abroad. “The best way out is to start exploring new markets, and this is going on despite the crisis,” says Anouar Hassoune, vice-president of the Middle East banking team at credit ratings agency Moody’s Investors Service. “It is a strategic necessity for banks.”
This could prompt more cross-border merger and acquisitions (M&A) activity in 2010, say bankers, particularly as asset prices have fallen to historical lows during the downturn, making such deals good value.
“M&A could be the biggest place in the market next year,” says Majid al-Refai, CEO of Bahrain’s sharia-compliant Unicorn Investment Bank. “Acquisitions are high on our list of priorities right now, but the big challenge is raising acquisition financing.”
Bond activity is also likely to be a significant growth area in 2010, in terms of both corporate and sovereign issues. For governments having to pay for large capital expenditure programmes, and companies needing to look outside traditional avenues to raise new capital, bonds present an ideal opportunity.
There is already evidence of this in the market. New issues of debt in the GCC reached $36.9bn at end of the third quarter of 2009, a 64 per cent increase on the same period in 2008.
Regulatory changes could encourage more issuers to follow in 2010. In June 2009, Saudi regulator the Capital Markets Authority approved the creation of a debt securities market on the Saudi stock exchange (Tadawul). The process should gain further momentum thanks to the large debt programmes undertaken by Abu Dhabi and Qatar over the past year, which have created a yield curve for GCC debt securities, making it easier to price new issues of corporate debt.
“There is a good chance that the current debt issuance in various sectors will merge into a quantum leap, as you have seen government benchmarks from Abu Dhabi and Qatar,” says Kotilaine. “Once the Saudi bond trading platform establishes itself, people will start paying attention.”
Government intervention will also boost the Islamic bond (sukuk) market, which is primed to emerge as the main driver in the Islamic finance sector in 2010. “The Islamic sector’s growth will depend more on sukuk and funds than on banks themselves, which are still constrained by capital,” says Hassoune.
“Sukuk will flourish in 2010,” says Al-Refai, whose bank is preparing a series of Islamic bond issues. He is confident that the Islamic finance market in general is set for further growth.
“It is the way of the future in both the Gulf and the Muslim world,” says Al-Refai. “It is based on real assets and has more chance to succeed than derivatives, which is [like] buying and selling air.”
The encroachment of Islamic finance franchises into new territory will be a key theme next year. Syria, where the banking system is slowly opening up due to government reforms, is a potentially sizeable new market.
“If you have a reasonable -product offering and value prop-osition, an Islamic bank will do very well in Syria,” says Bassel Hamwi, head of Banque Audi Syria.
But there are also opportunities for conventional banks in the country, given the government’s plans to launch a series of infrastructure schemes on a public-private partnership (PPP) basis. “The big challenge will be funding the PPP programmes and large infrastructure projects that will be sponsored by the government,” says Hamwi.
Neighbouring Lebanon, which has a mature and highly liquid banking sector, faces different challenges due to the risk of political instability.
“So long as the diaspora money is recycled through the banking system, liquidity is not a problem in Lebanon,” says Hassoune. “The issue in Beirut is all about confidence. How much does the diaspora believe the government can withstand major political or economic shocks?”
The situation in Lebanon makes clear the importance of confidence in all aspects of the banking market. In all of the countries in the Middle East and North Africa, the level of confidence banks have in any economic recovery will dictate their willingness to lend.
The key challenge for the Gulf governments is to ensure that any spending that does go ahead does not lead to another cycle of boom and bust.
In general, says Al-Refai, the bank is looking at 2010 as it did 2009: cautiously. “There is a lot of money in the market but only for some very good deals,” he says. “Saudi Arabia is a deep market; it has the money and the deals. On the other hand, Qatar and Abu Dhabi have a lot of cash but not a lot of deals.”
The hope is that the support governments have offered to their economies over the past year will create the conditions for a rise in lending activity, which could in turn enable them to emerge from a period of enforced slumber.