Globally, 2009 was another torrid year for the banking sector. But with signs of recovery in the global economy, profitability is improving and international banks are starting to emerge from the financial downturn.

The fallout from the global economic crisis took longer to hit Middle East banks, and only really began to hurt profits in late 2008. But in 2009, the full effects of the global crisis took their toll on the region’s banks.

International liquidity dried up, pushing up borrowing costs for the banks and narrowing their profit margins. Meanwhile, several high-profile regional companies have been forced into restructuring billions of dollars of debt. This has weighed heavily on profits in the banking sector, wiped out by rising write-offs and provisions.

Despite this, the total market capitalisation of the banking sector in the MEED 100 companies has grown to $231bn, up 36 per cent from $184.5bn in February 2009. This growth is a reflection of the banking sector being the biggest recipients of government support in the region, and the correlation to a recovery in global markets.

Government backing

For example, Qatar National Bank, buoyed by the strong Qatari economy, state support of the financial sector and low exposure to Dubai, has continued to climb the rankings and now sits just outside the top 10. Doha Bank also rose 20 places on the back of its strong government support, although after the end of the year the bank reported profit some 40 per cent lower than analysts’ expectations. Qatar Islamic Bank dropped out of the ranking as profits fell despite the government bailouts.

Despite the defaults on more than $20bn of debt by two of Saudi Arabia’s biggest family conglomerates – the Saad Group and AH al-Gosaibi & Brothers – the kingdom’s banks remain a dominant force in the Middle East’s banking sector. Six of the top 10 banks in the region by market capitalisation are Saudi banks, and nine of the kingdom’s 11 banks feature in the MEED 100. The region’s largest listed bank by market capitalisation remains Al-Rajhi Banking & Investment Company on $30.8bn. The UAE’s Emirates NBD – although the largest bank in the region by assets – is only number 50 in the ranking, with a market capitalisation of $3.7bn. It has dropped 18 places as its Dubai exposure depresses investor sentiment. Declining profits also weighed heavily on the bank last year, when it dropped from 14 to 32.

The region’s more troubled banks, such as Abu Dhabi Commercial Bank (ADCB) and Bahrain’s Arab Banking Corporation (ABC), were dropped by investors for their high levels of provisioning taken against bad loans. ABC fell out of the top 100 as a result. The collapse of the UAE real estate market caused National Bank of Fujairah and the National Bank of Umm al-Quwain’s share value to drop sharply, and they have also exited the MEED 100 this year.

Highs and lows

In contrast, National Bank of Abu Dhabi and First Gulf Bank have risen as investors factor in strong Abu Dhabi government support and successful bond issues that have helped bolster their finances.

Dubai’s Mashreq Bank, which fell out of the table last year following a 78 per cent fall in profits, has regained much of the ground it lost coming back in at number 44. This is despite most recent profit figures for the third quarter of 2009 showing a 42 per cent decline. Kuwait’s Boubyan Bank and Gulf Bank also re-entered this year.

The UAE is expected to be one of the most difficult banking markets in the year ahead, because of high levels of exposure to Dubai, and proposed regulations that would half the number of days it takes to class a loan as non-performing from 180 to 90. If approved, the new regulation would significantly increase provisioning levels and dent profits.

Outside the Gulf, 12 banks make it into the MEED 100 list. Last year there were only eight non-GCC banks in the top 100, reflecting the fact that the wider Middle East has been less affected by the global financial crisis.

The largest non-Gulf bank is Jordan’s Arab Bank with a market capitalisation of $8bn, but it slipped this year from 11 to 22 on the back of a fall in profits and $56m of provisions for non-performing loans and compensation for clients with exposure to disgraced US financier Bernard Madoff.

Although it may not have been a good year for the banking sector, the table still illustrates the lack of diversification on regional stock markets. Of the top 100 companies, just under half are banks. There also remains a dearth of large banks, capable of financing the regions mega-projects. Of the banks in the top 100, only six have a market capitalisation above $10bn.