Hoping the good luck will hold

14 March 1997

ON the evidence of the annual results released so far, many Middle East banks had another good year in 1996. The pace of economic growth quickened in most domestic economies and markedly higher oil prices boosted business activity in the oil-producing countries. The strong performance of world bond and equity markets has helped banks' investment portfolios. Even the peace process, the touchstone for international confidence in the region, has made some progress following the hiatus after Israel's Likud- led government took office last summer.

The general picture across the region has been positive, though not all banks have done as well as last year - in Saudi Arabia, several have seen their profits fall. It is too early to say whether or not 1997 will see the same string of healthy profit increases as 1996. World oil prices averaged more than $20 a barrel in 1996, a pleasant surprise for oil producing states which had budgeted for much lower levels. The factors behind this price strength - low stocks, tight supplies and vibrant demand - may not be sustained this year.

According to MEED estimates, the rate of gross domestic product (GDP) growth for the region as a whole, excluding Iraq and Libya, is likely to be slightly lower than in 1996. Yet some bankers are optimistic. 'We see (1996 levels of activity in the Gulf) as continuing and even improving,' says Mohannad Farouky, assistant general manager of Gulf International Bank (GIB) in Bahrain. GIB, which has just acquired a new general manager in the person of Abdullah Kuweiz, increased its own net profits for 1996 by 5 per cent (see below).

Arab bankers have long warned that the indigenous banking industry is overcrowded with institutions that are too small to fend off foreign competition and central banks in several countries are compelling local banks to increase their capitalisation. The year has seen one merger so far, between two small, Amman-based institutions - Jordan National Bank and Jordan Business Bank. Other Jordanian banks are under orders to raise their capital to at least JD 20 million ($28 million). Similar rules have been applied in the UAE and Lebanon in the recent past, but small banks in both countries managed to raise the necessary funding without merging or closing their doors.

Public goes private

One of the bigger items of news to emerge from the Arab banking industry this year is that one of Egypt's four state-owned banks may be privatised in the near future. Bankers have said for some time that this was a possibility, and a Central Bank official said it in public for the first time in February. Given that the four - Banque Misr, Banque du Caire, National Bank of Egypt, Bank of Alexandria - control about 80 per cent of domestic deposits between them, the effects of such a privatisation are likely to be profound.

The state banks are generally regarded by analysts as cumbersome and slow-moving, and even a year ago it was widely assumed that the government would be reluctant to give up the economic influence they provide. However, the success of recent privatisations in Egypt and the interest they have generated among foreign investors may be helping to change the government's mind.

Until that happens, the private-sector banks are likely to grow faster and be more innovative. 'With deregulation and the liberalisation of interest rates, the leaner, more focused private sector banks are better positioned to gain market share as product choice and customer service will assume greater importance to consumers,' says Morris Helal, bank analyst at ratings agency Capital Intelligence in Cyprus.

Here is a brief summary of 1996 results by country:

Saudi Arabia

Abundant oil revenues increased liquidity in the Saudi domestic market in 1996 as the government cleared some of its payment arrears, with the effect that demand for loans fell. Most banks have responded by channelling money into government securities instead. Exceptions to the general trend of shrinking loan portfolios were United Saudi Commercial Bank (USCB), which increased lending by 22 per cent during last year, and Saudi Investment Bank (Saib), which raised its lending by 12 per cent. The two are among the smaller of the Saudi banks and concentrate on lending to corporate customers.

Eleven of the twelve banks have reported their annual results so far, of which six made higher net profits. Most were up between 10 and 15 per cent. The single biggest improvement was by the kingdom's smallest bank, Bank Al-Jazira, which is now firmly back in the black. It announced net profits of SR 14 million ($3.7 million) for 1996, after just breaking even in 1995 and losing money in the previous two years. Saib came next with a 47 per cent rise in net profits to SR 125 million ($30 million).

Three banks announced lower profits than in 1995. Net income was down 15 per cent to SR 921 million ($246 million) at Saudi American Bank (Samba), an affiliate of Citibank, because of provisioning associated with the bank's recent drive into the retail market. Al Bank Al Saudi Al Fransi, an affiliate of Banque Indosuez, is understood to have raised its loan- loss provisions to cover a single large exposure outside the Middle East (see page 16). Its net profit fell 15 per cent to SR 301 million ($80 million). Profits at Saudi Cairo Bank fell by a similar percentage. Riyad Bank has yet to announce its results.


National Bank of Bahrain (NBB) saw its profits rise by 31 per cent, although its assets contracted slightly. In February, the bank was given a mandate to raise $520 million in term loans for the Hidd power and desalination project, a key part of the government's plans to build up local industry.

Gulf International Bank (GIB), the wholly-owned subsidiary of Gulf Investment Corporation that is based in Manama, increased its net profits to $94.5 million. GIB continues to be the most active Gulf bank in arranging syndications and other term financings. Investcorp, the bank which turned around Gucci and made a fortune from it, has reported record profits of $90.4 million. The result is impressive, though slightly lower than some analysts had expected.

Several of Bahrain's other offshore investment banks have reported a good showing in 1996 - perhaps to be expected given their exposure to the strong performance of world bond and equity markets last year. Bahrain Middle East Bank (BMB) has reported a 70 per cent rise in net income to $9.5 million on year-end assets of $646 million. The bank is slowly winding down its loan portfolio to concentrate on investment banking activities, notably the creation of subsidiaries to invest in US collateralised securities.

Bahrain International Bank (BIB) made net profits of $21.7 million from an asset base the same size as BMB's, partly through sales of corporate holdings in the US. The bank also made its mark in the Gulf's fledgling capital markets by underwriting a public offering in one of Oman's family- owned holding companies. A third and smaller institution, TAIB Bank, pushed up its net profits by just over 7 per cent to $10.4 million. TAIB, which concentrates on Middle East and Asian markets, is setting up a small investment bank in Kazakhstan this year.


Results released so far have confirmed bankers' expectations that 1996 would be a good year for Kuwait's banks. National Bank of Kuwait (NBK), which dominates the local market, boosted its net profits by 9 per cent last year to KD 71.3 million ($238 million). NBK's triumph of 1996 was its leading role in putting together a package of $1,200 million in project financing for the Equate petrochemical plant, without export credit agency support. Other local banks underwrote part of the package.

The sale to the private sector of the state's shareholdings in the banks is continuing: a 3.8 per cent stake in Gulf Bank was sold in January. Gulf Bank's profits rose by 23 per cent on the year, while Commercial Bank of Kuwait more than doubled its net profits to KD 17.3 million ($57.2 million).


Few banks have released their results so far. MashreqBank reported another healthy rise in profits to AED 350.5 million ($95.4 million), an increase of 8 per cent on 1995. Provisions also rose: the bank has a policy of immediate provisioning against new customer credits. Commercial Bank of Dubai reported another strong performance for last year - profits were up 18 per cent at AED 143.8 million ($21.6 million). Two Sharjah banks, Bank of Sharjah and Investbank, also notched up profit rises.

Union National Bank, which was formed from the UAE affiliate of the disgraced Bank of Credit and Commerce International (BCCI), has been able to publish its balance sheet for the first time since 1991 after the settlement of compensation for BCCI's creditors. The bank made net profits of AED 75 million ($20.3 million) in the first half of 1996.


Banque Audi has announced net profits of £Leb 30,710 million ($19.8 million) in 1996, up by about 50 per cent on the year before. Assets grew by 35 per cent to £Leb 2.86 million million ($1,845 million).

Byblos bank also reported higher profits and balance-sheet growth. Preliminary figures for other banks indicate that many have increased their deposit base in the last year. The banks' loan to deposit ratios remain low, despite the desire of the central bank that they increase medium-term lending. It appears that the attraction of high returns from government treasury bills remains strong, though T-bill yields have been falling for at least the last year.

Islamic banks

The results released to date by Islamic commercial banks indicate that the sector remains an extremely lucrative one. Saudi Arabia's Al-Rajhi Banking and Investment Corporation reported an 8 per cent rise in net income to SR 1,208 million ($322 million), maintaining its status as the Gulf's most profitable bank. The increase is, however, less spectacular than the 27 per cent rise in the bank's profits in 1995.

Al-Rajhi is the only dedicated Islamic bank in its domestic market and seems likely to remain so. Some observers say new Islamic banks could emerge in the Kuwaiti market in the next few years to challenge the predominance of Kuwait Finance House (KFH), which made gross profits for 1996 of KD 81.4 million ($271.5 million), a rise of 8 per cent on the previous year. There are stirrings in the Islamic market elsewhere in the Gulf: a new bank is being set up in Abu Dhabi with some participation from public bodies there. At the moment Dubai Islamic Bank is the only one of its kind in the UAE.

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