LONDON: Performance must justify the presence

06 March 1998
SPECIAL REPORT BANKING

ARAB banks surfed into London on a tidal wave of oil wealth in the 1970s and 1980s. Since then, the flow of capital has subsided and banks have had to find other reasons to justify their presence. Although a few thrive by concentrating on trade finance or investment management, some bankers wonder whether all of the 27 Arab commercial banks in London are actually making money.

The commercial banks are a disparate group. Some have only a representative office in London. Others, like the subsidiaries of National Bank of Egypt and National Bank of Kuwait, have bigger balance sheets than many banks in the Arab world.

It no longer seems possible, as it did two decades ago, for Arab banks to become big players in global banking. If there is a theme that links their experiences in London in the 1990s, it is probably that they share a need to justify their existence by specialising and improving on those businesses where they can play a useful role.

'Fewer banks from the region are in pursuit of some sort of global operation. They show signs of being more disciplined about the kind of things they should specialise in,' says Christopher Keene, general manager of United Bank of Kuwait. UBK, a well-regarded institution owned by a group of Kuwaiti banks, has carved its own niche by creating sophisticated investments in the West for customers in the Gulf, including UK mortgage securitisations and a range of investment funds.

Lots of reasons

On the face of it, there are a lot of reasons why Arab banks would want to be in London. Apart from its status as one of the world's leading capital and money market centres, the city also offers banks a home within the walls of the EU. It is also a destination for hundreds of thousands of Arabs who come for holidays or for medical treatment, particularly from the Gulf. The question that banks face is whether this presence is worth the expense of setting up a subsidiary or a branch.

Not everyone thinks so. Abdul-Magid Breish is the chief executive of ABC International Bank (ABCIB), a profitable bank which concentrates on trade finance. His view of Arab banks in London is bluntly put. 'You can split them in two. One set is making money and the other isn't. If you're not making money, the question is how long you can keep going before your head office shuts you down.' Breish, whose bank is part of the Arab Banking Corporation (ABC) group, is scathing about the argument that Arab banks need a branch in London to fly the flag internationally. 'If the unit is just sitting there paying UK salaries and taxes, buying a whole load of securities and obtaining cheap funding from the parent, is this something that they need?'

It is hard to find out who makes money in London and who does not, because most banks are represented by branches whose results are consolidated into those of the parent bank. However, few banks have actually downgraded their presence in London over the years: the most significant exception is Saudi Arabia's National Commercial Bank (NCB), which handed back its branch licence in May 1992 after admitting that it had not been profitable for the previous five years. NCB's representative office was kept open.

But London has not lost its magnetic attraction for Arab banks: there are rumours, which could not be confirmed before MEED went to press, that a Kuwaiti bank is planning to set up shop in the city.

The Arab banks which do publish separate results - those incorporated in the UK - appear to be doing well enough. ABCIB itself has just reported a 23 per cent rise in net profits for 1997 to £11.3 million ($18.5 million) on assets of £1,550 million ($2,536 million). The bank has begun absorbing the European and US branches of the ABC group, which will more than double the size of its balance sheet in the next couple of years. The driving force behind the changes is a restructuring of ABC intended to cut costs and make the group more efficient. ABCIB has already done some cost-cutting: it made 23 people in London and Paris redundant last year and closed its private banking branch in the West End, the shopping and hotel district of central London where many Arab visitors prefer to stay.

When the Arab banks first set up in London, the place to be was the City, the capital's financial district. Many banks have now moved a few miles across town to the West End. This geographical shift reflects changing priorities. For many banks, serving private clients is now as important as keeping up with the syndicated loan market. 'The Arab banks have realised that there's no technical reason why they have to be in the City,' says Martin Bowen, London manager for Qatar National Bank (QNB).

QNB opened in the City in 1980 and has just moved to new premises in Mayfair, the most exclusive part of the West End. 'I spent 10 months in the City [branch] and I had three customers come to see me,' says Bowen, who joined QNB two years ago. During the summer months, QNB is kept busy serving Qatari customers who come to London for their holidays. For the rest of the year, retail banking is not a big earner - the Qatari population in London is too small - but QNB's status as Qatar's largest bank means that it is well-placed to intermediate in trade and project financings related to the country's ambitious plans to develop its gas resources. 'The difficulty for banks is to find a niche. Qatar is a small country but a big borrower, and that could be our niche,' Bowen says.

Those banks that remain in the City tend to be the ones with a more wholesale focus, like Jordan's Arab Bank. The bank, which has a balance sheet of about £3,000 million ($4,908 million), has become more active in project and trade finance in the last few years, according to general manager John Carney. 'Some banks only do business if there is some Middle East connection. We're not like that at all.' He says the branch does make a profit in its own right. It now plans to step up its investment management activities, developing new funds and other products which can be marketed across the bank's worldwide network.

Going into the future, Arab commercial banks face the same issues as their non-European counterparts in London. European monetary union (EMU) is due to be implemented between 1999 and 2002, although the UK will not take part in the initial stages. EMU is expected to mean a big increase in cross-border competition between banks across Europe for deposits denominated in the new currency, the euro. This is likely to be more of a problem for the bigger Arab banks with a Europe-wide focus than for the small players that concentrate on their home countries.

Arab banks, like all other institutions that use computers, will have to make sure that they upgrade them to avoid the 'millennium bug', the inability of some systems to cope with the change of date from 1999 to 2000. Regulation is also a live issue: the regulatory functions of the Bank of England are being subsumed into the new Financial Services Authority. This in itself should not mean much change for the way banks are regulated, although some bankers criticise what they see as the growing intrusiveness and cost of regulation in general.

But the biggest issue in the longer-term for all Arab banks in London is the question of whether the advantages of having a subsidiary or a branch there outweigh the costs.

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