Gulf banks earn bragging rights

19 November 2004
Global bankers should be permitted a surge of envy when they consider their peers in the Gulf. To be operating in some of the world's fastest growing economies, where opportunities abound in retail, corporate and investment banking at a time of benign regulatory reform and fast-growing demand for their services, could be seen as a luxury.

Certainly, the nine-month interims reinforce the view: profits are booming. Of the 13-strong cross-section sampled (see table) only one bank posted an earnings decline, while the remaining dozen all saw double-digit growth and nine saw profits rise by more than 20 per cent.

Those global peers hoping for just a little misfortune are likely to be disappointed. Things are about to get even better. If there has been a cloud, it has been the low interest rate environment. Given the disproportionately high levels of non-interest bearing deposits (NIBs) on regional bank books, and the general heavy reliance on customer deposits for funding, as interest rates began unwinding in the summer of 2000 there was limited room for manoeuvre and for most banks some degree of spread compression was experienced. While the pain was limited by robust - and good quality - credit demand growth and in many cases successful development of non-interest income streams, even this cloud is being blown away.

US Federal Reserve chairman Alan Greenspan has been working up interest rates over the last six months and rates in the Gulf have followed, with all rising from the lows hit in March and April (see chart). Expect Gulf bank profits to rise with them - strong loan books assembled and expanded in the prevailing benign macro-economic conditions are perfectly positioned to sustain some widening of spreads that the banks will undoubtedly manipulate.

The interim results demonstrate that not only profits are growing. The balance sheets of all but three of the banks surveyed expanded - some extremely rapidly - in the first nine months of the year, and the three exceptions are easily explained. Arab Banking Corporation has halved its balance sheet through the sale of its stakes in Banco Atlantico and International Bank of Asia. And the two Kuwaiti banks, National Bank of Kuwait (NBK) and Gulf Bank, have experienced a forecast slimming effect following the abolition of the 88:12 ratio which stipulated the maximum proportion of deposits that could be extended as consumer lending (MEED 30:4:04, Cover Story, pages 4-6).

But perhaps the one trend that the figures don't show is the growing development of regional strategies. A growing proportion of the regional banking heavyweights are looking for opportunities in other regional markets. To date, only Ahli United Bank, NBK and Bank Muscat have made serious cross-border merger and acquisition moves. Others, such as Emirates Bank, have gone organic by obtaining licences. Over the next 12 months both models are likely to be deployed with greater frequency. Where in the past an international strategy was a luxury, it is fast becoming a necessity.

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