Provisions rise ahead of a risky year

06 March 1998

A sound performance in 1997 is no guarantee of an easy future as Arab banks face the fall-out from Asia. MEED reports

ARAB bankers have good cause for satisfaction. The 1997 results now rolling in show another year of double-digit profit growth before provisions, tight control of lending and strong returns from securities. Though it is still a dark cloud on the horizon, Arab banks have so far escaped the financial storm in southeast Asia. And with the latest Iraq crisis defused, the region can get back to business as usual.

However, the year ahead is likely to be more challenging. Provisions are rising against possible credit losses due to the Asian crisis and the fall in the oil price, in large part caused by collapsing demand in the Far East, will hit all of the region's economies.

Among the highlights of the reporting season so far:

Gulf Investment Corporation (GIC), the investment bank owned equally by the governments of the six GCC states, reported net income of $127 million and a 15 per cent leap in assets to $12,100 million. Profits were only up only 3 per cent on 1996 due to substantial provisioning against Asian risks as GIC 'decided to take a conservative stand towards provisioning against its exposure in the countries affected.'

Bahrain-based Gulf International Bank (GIB), wholly-owned by GIC, allocated $30 million against possible credit losses to report net profits of $84.4 million, down from $95 million in 1996. The net profit figure after provisions delivered a 12.5 per cent return on shareholders' equity.

Asset sales helped boost figures at some banks. Bahrain-based investment bank Investcorp lifted net profits by 20 per cent to $109 million, aided by the sale of Prime Service, a US company it bought for $300 million in 1994. Bahrain International Bank raised net profits by 41.5 per cent to $30.7 million on the back of a good performance in investment and corporate finance, and what it said was a significant capital gain from the sale of its stake in Dubai-based marine services company, Nico Middle East.

Saudi Arabia's most profitable bank, Al-Rajhi Banking & Investment Corporation, hiked profits to a record $347 million in 1997, up 8 per cent on the previous year. Al-Rajhi, Saudi Arabia's only fully-fledged Islamic bank, boosted investment income and slashed costs.

Nor far behind, Saudi American Bank (Samba) increased profits by 13.1 per cent to $278 million, despite a sharp fall in interest income - a feature at most Saudi banks last year. Saudi British Bank did well from its investment portfolio to boost profits by 16 per cent to $144 million. Arab National Bank, 40 per cent owned by Arab Bank of Jordan, increased profits by 7 per cent to $132 million although lending was reduced, counter to the trend at other Saudi banks.

At Saudi Hollandi Bank profits were up 30 per cent to $56 million on a strong investment performance. Results are still awaited from the largest Saudi bank, National Commercial Bank.

Higher provisioning limited profit growth at Kuwait's largest bank, National Bank of Kuwait, to 3 per cent in 1997. Net profits of $240 million may be difficult to repeat as NBK general manager Ibrahom Dabdoub expects 1998 to be a tougher year for NBK and all Arab and international banks.

The largest Arab bank in asset terms, Bahrain-based Arab Banking Corporation (ABC), is in the throes of implementing changes under a new chief executive, Ghazi Abdul Jawad, who moved down the road from GIB a year ago. The reordering should help rationalize an institution that had lacked direction in recent years, refocus the bank along product lines, remove duplication within a sprawling network and cut costs.

London-based ABC International is assuming a key role as the new centre for all of ABC's interests in the western world (see page 16). Given its size, ABC has underperformed regional rivals in recent years, but analysts do not expect the changes to be reflected in profit performance for another year or so.

Other changes afoot include the prospect of more mergers as the region bolsters its myriad banks in the face of globalisation, privatisation and deregulation. Gulf investors have been snapping up Lebanese banking interests and the merger of Saudi Cairo and United Saudi Commercial Bank has created the third largest bank in Saudi Arabia (see page 16). Despite an initiative in December to treat the GCC as a true common market and allow commercial banks from the six member states to set up branches in any GCC country, there have been no signs yet that GCC banks are keen to do so.

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