As Gulf banks look to offset slower growth at home in wake of the global financial crisis, they are increasingly seeking to generate new revenues by expanding into the wider Middle East region and beyond.

The combined loans provided by the GCC’s 150 or so banks stood at about $890bn in 2009, just 2.2 per cent higher than in the previous year, according to US ratings agency Moody’s.

The growth was much slower than the 33.4 per cent recorded in 2008 and the record rise of 34.9 per cent witnessed in 2007.

In tandem with the slowdown in lending, banks have been confronted with a rise in non-performing loans (NPLs) as customers have struggled to repay their debts.  

Non-performing loans in the Gulf

The average NPL ratio of Gulf banks increased from 2.5 per cent at the end of 2008 to 4.3 per cent at the end of 2009. This is expected to increase to about 9 per cent in 2010, according to the Washington-based Institute of International Finance (IIF), the global association of financial institutions.

Consequently, the banks’ combined provisions increased from $6.8bn at the end of 2008 to $12.8bn at the end of March 2010. This, inevitably, has impacted on their bottom line.

The UAE’s Emirates NBD, the region’s largest bank by asset size, reported a 60 per cent drop in third quarter profit this year to AED424m ($115m), from AED1.05bn in the same period in 2009. This fall in profitability came on the back of a sharp increase in provisioning. Its total provisions during the first nine months of the year amounted to AED2.98bn, including exposure to impairments on the renegotiated $23.5bn Dubai World debt deal. Customer loans declined by 6 per cent over the period to AED201.1bn.

Against this backdrop, it is not surprising that banks are now casting their eyes further afield for new growth opportunities in markets with solid macroeconomic fundamentals. 

In particular, Gulf lenders are showing a keen interest in Libya, which shed its pariah status in 2004 after the lifting of US and European-imposed sanctions. 

The country has been vocal about plans to liberalise its economy. The government announced a reform programme for the banking sector in 2007, with the stated aim of making Tripoli a regional finance hub by 2012.

Although the five state-owned banks continue to dominate, Libya has slowly begun opening up its banking sector to foreign investors. In 2008, Jordan’s Arab Bank bought a 19 per cent stake in Wahda Bank. Previously in 2007, BNP Paribas of France acquired a stake in state-owned Sahara Bank.

The Mena region has … a strong banking infrastructure, and we are studying all possible opportunities

John Iossifidis, Mashreq

In early 2010, Emirates NBD, Dubai’s Mashreq and Qatar Islamic Bank (QIB), were shortlisted for a licence to operate in Libya, before losing out to Italian bank UniCredit, which won the bid to own a 49 per cent stake in a new greenfield bank on 9 August this year.

QIB, which has a representative office in Libya, was planning to open a branch with a paid-up capital of $600m, according to an industry insider, but has since declined to comment on these plans.

Emirates NBD has resumed talks with the Libyan central bank and is considering other possible options.

“We are looking at opening a representative office, but we’re particularly interested in partnering with a local private bank,” says Kevin Flannery, general manager of international expansion at Emirates NBD.

Flannery says the best opportunities lie in wholesale banking, especially project finance for infrastructure development in the oil sector, as well as construction of schools, hospitals and railways.

Aside from boasting Africa’s largest oil reserves, Tripoli is ploughing $60bn into infrastructure projects, such as the construction of the $5bn Energy City Libya project, as well as the high-speed railway linking the country’s main cities along the Mediterranean coast.

Flannery says such projects desperately need local advisory, but there is no expertise on the ground to develop such mandates. Gulf banks are keen to plug this gap.

Egypt expansion for Gulf banks

Mashreq also views Libya as a long-term opportunity, but is more immediately focused on tapping the trade and labour flows between Egypt and the Middle East region, where 2 million Egyptians are currently living and working.

“We already have 10 branches across Egypt, but are looking to open new branches, as well as offering new retail and corporate services based on customer financial requirements,” says John Iossifidis, head of international banking at Mashreq.

The bank is eyeing opportunities in other Middle East and North African (Mena) countries, such as Morocco, Tunisia, Algeria and Syria.

“The Mena region has proved time and time again to have a strong banking infrastructure, and we are studying all possible opportunities,” adds Iossifidis.

Emirates NBD is also keen to build up a presence in Asia and opened its first branch in Singapore on 25 November, further expanding its international operations, which include branches in Saudi Arabia, Qatar, the UK and Jersey, as well as representative offices in India and Iran.  

“The bank’s objective in opening a branch in the Asia Pacific area is to position itself in a convenient hub to cover the world’s most dynamic economic region, which includes the strong emerging markets of China, India, Southeast Asia and other East Asian countries,” says Ahmad al-Tayer, chairman of Emirates NBD. 

The UAE is Singapore’s second largest trade partner in the Gulf, with total bilateral trade of $8.87bn, and the bank hopes its branch will help to facilitate investment flows.

The branch will also focus on wealth management, targeting individuals from the Middle East looking to base part of their offshore assets in Singapore, and will promote Mena investments to wealthy Asians.

Gulf banks targeting Asia

Qatar’s largest lender, Qatar National Bank (QNB), is also looking to break into Asia through acquiring an 82.4 per cent stake in Indonesian Bank Kesawan’s rights issue, expected to close in the first quarter of 2011. 

QNB is acting as the standby buyer for the $81.7m issue by the Indonesian lender, which has a market capitalisation of $55m and operates 33 branches throughout the country.

QNB has been aggressively growing its market share abroad over the past few years, acquiring a 50 per cent stake in Tunisian Qatari Bank, a 34.3 per cent stake in Jordan’s Housing Bank for Trade & Finance and a 23.8 per cent stake in the UAE’s Commercial Bank International.

In May, it secured approval from the Syrian central bank to raise its stake in QNB-Syria, its Damascus-based subsidiary, to 55 per cent from 49 per cent, with plans to increase its capital to $300m.

The bank is also looking to grow organically by adding to its branch network. It plans to operate 15 branches in Syria by the end of 2010, four in Oman and five in Sudan by the end of 2011, up from a respective three, one and one. In addition, it is looking to open a branch in Lebanon in mid-2011.  

The bank’s objective in opening a branch in the Asia Pacific area is to position itself in a convenient hub

Ahmad al-Tayer, Emirates NBD

National Bank of Abu Dhabi (Nbad), the Gulf’s second largest lender, is also scaling up its presence overseas; it currently has more than 150 branches spread across the Mena region. In February, the bank inaugurated its first branch in Jordan and in September, it secured a licence to set up a new bank in Malaysia with a capital of AED352.6m, which will open in 2011. It has also set targets for new branch openings by 2014.

“We are looking to increase our branches from 28 to 50 in Egypt, from eight to 14 in Oman, as well as adding five new branches in Jordan,” says Suvo Sarkar, general manager of Nbad’s consumer and elite banking. “We are now studying other market opportunities in Syria and Lebanon, as well as further afield in Hong Kong and China.”

One market in the Middle East that will offer attractive opportunities for Gulf lenders in the years ahead is Iraq. The country’s banking sector is still very much in its infancy, contributing only about 7 per cent of the country’s gross domestic product in 2009 – a low figure in comparison to neighbouring countries such as Lebanon, Egypt and Jordan, where it comprises more than 50 per cent.

Rebuilding Iraq

There are currently only six foreign banks with a presence in Iraq, but there is a growing appetite among other institutions looking to capitalise on upcoming infrastructure projects. The bill for building work in Baghdad is estimated to stand at $400bn and Iraq has also earmarked 30 per cent of its $72bn budget for 2010 towards reconstruction efforts.

Iraq’s retail banking sector is underdeveloped, largely due to the fact that only a relatively small proportion of Iraqis have confidence in the banking system.

In February 2010, Abu Dhabi Islamic Bank (ADIB) became the first UAE bank to win a preliminary licence from the Central Bank of Iraq to open a branch in Baghdad. At the time, the bank said it hoped to open branches in every major business city in the country, including Basra, Erbil, Najaf, Karbala and eventually Mosul.

In July this year, the Iraqi central bank said it was in talks with up to seven foreign banks, including Gulf lenders, looking to join forces with domestic banks. However, the scheduled June launch of ADIB’s Baghdad branch has been postponed indefinitely, and the central bank has placed several applications on hold in light of a deterioration in the security situation.

For now, Iraq remains the preserve of a brave breed of investor prepared to commit investments towards a high-risk, high-reward strategy.

With analysts predicting that loan growth will remain sluggish over the next couple of years in the GCC countries, especially in Dubai, the broader region is looking ever more attractive for investment. From setting up representative offices to branch openings and acquisitions of local institutions, this region is set to play a more important role for Gulf banks in the years ahead.