RESULTS announced so far show that 1995 was a positive year for the Middle East financial community. International bond markets were buoyant and earnings from investment securities increased. Oil prices rose strongly in the first half of the year, easing the pressure on government budgets and boosting confidence. Most banks saw their profits rise.
The highest profits so far reported are from Saudi American Bank (Samba), which increased its earnings by 6 per cent to set a new record of SR 1,071 million ($286 million). Other strong performances were reported by Investcorp, Gulf International Bank, Gulf Investment Corporation, Saudi British Bank and MashreqBank.
Arab Banking Corporation (ABC) recovered some of the ground lost in 1994, reporting profits up by 10 per cent to $116 million in 1995. However, this was still below 1993 earnings of $135 million. Ahrned Abdellatif is now coming up to a year as president of the bank, and several new initiatives are emerging, including the launch of an Islamic banking subsidiary, which is expected this year. Gulf International Bank (GIB) and Investcorp also lifted earnings in 1995.
Investcorp’s profits rose strongly on the back of the successful sale of shares in the luxury goods group Gucci. The investment bank says 1996 will be a better year for acquisitions.
Bahrain International Bank (BIB) and Bahrain Middle East Bank continued to reduce the size of their balance sheets as a result of their shift towards investment banking activities. BIB’s assets fell by 14 per cent in 1995 to $600 million.
A more mixed picture has emerged for Bahrain’s onshore banking community, as the local market remained depressed. However, a notable exception was Al-Ahli Commercial Bank, where profits rose 13 per cent to BD 5.3 million ($14 million).
The four public sector banks in Egypt all reported a steady rise in profits in fiscal 1994/95. National Bank of Egypt led the way among its public sector rivals with a 21 per cent rise in earnings to £E 29 million ($9 million). However, this is only a 6 per cent return on shareholders’ equity, and does not compare with Commercial International Bank (Egypt – CIB) profits for 1995 of £E 218 million ($64 million) from a far smaller balance sheet. Nevertheless, the public sector banks pre-empted their private sector competitors with the launch of local mutual funds in 1995. By the end of last year, eight mutual funds had been launched, with all but two issued by public sector banks. Several new issues are in the pipeline for 1996.
The local capital market was boosted by the increase in financial instruments available to banks during 1995. The issue of £E 3,000 million ($885 million) worth of government bonds in May was well received and there has been a steady trade in the secondary market. The corporate bond market got a boost early this year, with Citibank’s launch of a £E 200 million ($59 million) bank bond. The funds will be used to develop Citibank’s local activities.
Next in line is Egyptian American Bank, which is expected to launch a £E 200 million facility in March or April. A further initiative came from CIB in February, when it announced plans to increase its capital with an issue of global depositary receipts (GDRs).
Profits for Kuwaiti commercial banks improved in 1995, although none of them has yet released full results. The banks have proved their determination to become more active in meeting Kuwait’s financing needs, by dominating the line-up of institutions raising finance for the $2,000 million Equate petrochemical project.
The Gulf Bank, which was part of the financing group, is one of the first banks in the region to be rated by a leading international agency. In January, the bank received a long-term credit rating of BBB+ from the London-based IBCA, following the A sovereign rating that was assigned by IBCA to Kuwait in December 1995. ‘You become more a part of the international banking community,’ says Gulf Bank general manager, John Harris.
All the banks to have reported so far increased their earnings in 1995, and balance sheets have continued to grow strongly. The main focus of attention in 1995 was the effort to raise new capital and development of the local financial market.
This year is expected to be another busy period.
Banque Audi and Byblos Bank both increased their capital during 1995 with high profile international deals. Banque Audi raised $34 million with an issue of GDRs, while Byblos Bank raised $11.6 million through a private placement. Banque de la Mediterranee became the highest capitalised bank following an injection of funds which boosted capital to £Leb 160,000 million ($100 million). Banque Libano-Francaise plans to capitalise some of its reserves in April of this year; Fransabank boosted its capital base in April 1995.
Banks are now in a position to become more active lenders, and the growth in the local capital market is proving an added spur. The Beirut bourse reopened in January this year. However, there remain certain constraints on the banks. Government borrowing threatens to crowd out the private sector, and banks are required to keep 40 per cent of deposits invested in treasury bills. With interest rates on one-year treasuries hitting 40 per cent in October, there is little incentive to search for new markets to improve earnings.
With more than half the results for 1995 released, the overall picture is one of improved profits and generally modest balance sheet growth. Samba led the way and strong performances were also reported by Saudi British Bank, with a 15 per cent increase in profits to SR 403 million ($108 million), and Saudi Investment Bank, which increased earnings by 27 per cent to SR 85 million ($23 million). Bank al-Jazira’s efforts at restructuring were rewarded with a return to profit in 1995.
‘Demand for credit has been fairly low, but there are a number of large infrastructure projects around in the kingdom,’ says one Riyadh-based general manager. The $700 million syndicated loan for Saudi Petrochemical Company (Sadaf) was signed in November 1995 and several new opportunities are emerging in 1996, including financing for the Ghazlan power station expansion, which is expected to include a $500 million syndicated loan.
However, a tight rein on government spending continues to dampen hopes of a major improvement in the economic climate.
‘Given the recent budget, I don’t anticipate a large upturn in general commercial activity during the year,’ says the Riyadh banker.
Delays in payments to the agriculture sector by the government are also weighing on the market. In early 1996, the government issued certificates to small farmholders worth SR 800 million ($232 million) with maturities of between six months and twoand-a-half years. Bankers are still uncertain whether the certificates are negotiable and can be held in lieu of payment from the farmers. Payments still due to the agricultural sector are officially estimated at SR 9,705 million ($2,590 million).
After a strong performance in 1994, the first results for 1995 indicate another buoyant year in the UAE. Heading the list for profits so far is MashreqBank, reporting income 8 per cent higher at a record Dh 324 million ($88 million). MashreqBank chief executive officer Adelaziz Al-Ghurair says the improvement came from an expansion in both corporate and retail banking, and says he is confident that the market will continue to grow in 1996. ‘Most banks will show growth in their loans portfolio,’ he says. ‘The challenge is how much market share will come to you and how much will go to your nextdoor neighbour.’
Demand for consumer finance remains strong, while the real estate sector is expected to slow by the end of the year. AlGhurair says the project finance opportunities for local banks are limited.
‘Most banks in the UAE have done very little long-term financing of big projects.
There is a learning curve for everybody to get involved in these projects,’ he says. ‘I don’t think we will see dramatic growth in this area.’