Risks on the rise after a bumper year

18 February 1994

AS the trickle of early bank results turns into a steady flow, the news from the region is almost universally upbeat. The strong earnings growth of recent years has continued and 1993 proved to be a bumper year for many banks. So far every institution has reported a rise in profits and the damage inflicted by the Kuwait crisis is now a distant memory for most of them. Many banks have taken advantage of buoyant market conditions to raise new capital and meet Bank for International Settlements (BIS) capital adequacy ratios. They are now well-placed to pursue new business opportunities or weather an economic downturn.

The tone for Saudi Arabia was set by the first bank to report, United Saudi Commercial Bank (USCB), which posted a 26 per cent increase in earnings for 1993 to $71 million. Net profits at the kingdom's largest joint-venture bank, Saudi American Bank, were up by 3.5 per cent at $251 million but fell short of the ambition to make a billion riyals. Having raised new capital and cleared its books of bad debts, Saudi Cairo Bank reported a 59 per cent rise in profits to $57 million and is paying the first dividend for nine years. In November, the sleeping giant of Saudi banking, National Commercial Bank (NCB), released its first figures since 1989. The 1992 results showed the bank with sharply reduced assets but armed with $1,600 million in new capital.

The sharp fall in oil prices and the plans for a 20 per cent cut in government spending this year will present new challenges for Saudi banks. Deposits declined during the fourth quarter of last year from peaks in August and much of the steam is coming out of property and stock markets after three buoyant years. 'We have seen investors coming in and investors going out. They tend to move like flocks of sheep,' says a senior executive at a Riyadh bank. The riyal was also under pressure and some observers say funds were flowing out of the country amid fears of a devaluation.

The impact of the budget cuts and the slowing of government payments has yet to be felt. 'We are still trying to feel our way through things and it's difficult to be sure where they are going. Private-sector growth has been dramatic but there has been an easing of the volume of business,' says Andrew Dixon, managing director at Saudi British Bank.

The tighter financial climate will put pressure on the banks' corporate clients if payments delays start to mount. According to Henry Azzam, chief economist with NCB in Jeddah, the demands on the banks from government, state organisations and the private sector are certain to increase. Initially, this presents a dynamic opportunity rather than a deterrent to business. 'Banks will continue to do well. The demand for their services is on the rise but they will have to be more careful, more choosy - there will be no need to market themselves,' Azzam says.


The crunch is likely to come later in the year when slower payments are expected to impact. Azzam expects to see higher provisioning in 1994. 'We haven't felt the heat yet,' he says. 'We do have a slow down. We are seeing more demand for money but there's a limit to what the banks can do. In 1994, they will build on the strength of their capital increases and will lend to fill the gaps left by the government.'

Bahrain's big offshore banks have had another good year with both Arab Banking Corporation (ABC) and Gulf International Bank (GIB) finding lending opportunities, containing costs and earning more from treasury operations. GIB's net profits grew by 38.5 per cent to $88 million, and contributed strongly to the record profits declared by its Kuwait-based parent, Gulf Investment Corporation. Conditions could get tougher this year as reduced oil export earnings impact across the region. 'I will be happy if this year is as good as the year before. We hope we'll come close to our 1993 results,' says Abdullah Saudi, chief executive at ABC. Saudi anticipates difficulties this year but considers lower oil prices to be double-edged, opening up opportunities as well as closing them off. 'Sometimes it's a blessing, sometimes it's not. We didn't have a lot of borrowers these last few years.'

Back to basics

The period of easy money to be made through enhanced treasury activity may also be drawing to a close and banks will have to get back to more basic business. 'Most banks have been making their money through non-traditional activities,' Saudi observes. ABC is defending itself against the business cycle by following its expansion into Europe with a thrust into the Far East. It has brought Chinese partners into its wholly-owned Hong Kong subsidiary, International Bank of Asia (IBA), and is targeting trade finance opportunities on the mainland. 'We are a diversified bank. Asia will not give immediate results, it's a question of building up a presence,' says Saudi.

Among the smaller offshore banks, Bahrain Middle East Bank was firmly back in the black in 1993 with profits of $6.12 million after recording a loss in the previous year due to heavy provisioning.

Kuwait's largest commercial bank, National Bank of Kuwait (NBK), has turned in a 22 per cent net profit increase for 1993 at $175 million. The bank is the most international of Kuwait's commercial banks which gives it a growing edge over its domestic rivals. Most are mired in the complex state-sponsored debt settlement programme. Activity in the home market is still depressed although there are determined efforts to talk it up. 'If you are faced with an economy which is half full, you mustn't look at it as half empty,' says a senior executive with a Kuwaiti bank. However, he concedes that two of the main catalysts for economic growth, public-sector spending and state purchases of land, have not resumed their traditional role.

Pressures for Kuwaiti banks to merge have eased as the debt settlement programme means they are no longer in danger of collapse. Central bank governor Sheikh Salem Abdelaziz al-Sabah has floated plans for allowing foreign banks to take up to 40 per cent of Kuwaiti institutions but the climate is hardly auspicious. 'No bank worth its salt is going to take a minority position,' says a foreign banker.

With JP Morgan and Chemical Bank, NBK has won the mandate to advise Kuwait's Petrochemical Industries Corporation and Union Carbide of the US on their joint-venture petrochemical scheme which could develop into a major project finance opportunity in an otherwise flat market.


The first UAE bank to report, Mash-reqBank, saw a 21 per cent growth in profits for 1993 to $69 million. Known as Bank of Oman until last October, the bank increased its lending by 23 per cent and managed to cut provisions and other expenses sharply. Amid signs of a surge in lending last year, the central bank intervened in October to restrict lending to individual customers to 7 per cent of a bank's capital. Foreign banks, in particular, gave the measure a hostile reaction and have petitioned for their global capital resources to be included due to their relatively low local capitalisation. Despite a clarification at the end of the year, foreign bankers are still concerned by the restriction (see page 17). In remarks reported in mid-January, the chairman of the UAE banks association, Abdullah al-Ghurair, said the continued high level of trade and construction activity was the main reason for the improvement apparent in the unaudited results of most banks for 1993.

Bankers in Cairo are hoping that the feverish international interest in emerging markets will be extended to Egypt's reformed economy. 'We are starting to come out of recession, the economy is picking up and there is business potential for local and foreign institutions,' says Mohamed Ozalp, senior general manager at Misr International Bank. Ozalp says there are good opportunities to lend to industrial and commercial ventures, and that trade finance is growing on the back of much more competitive local exports. Several foreign bank branches have increased their capital and are now dealing in local currency and the debt buy-back market has been active. However, capital market activity has not taken off as anticipated and Egyptian privatisation is still in its infancy. 'It is slower than we would like but it's moving,' says Ozalp.

Market opening initiatives are under way around the region as its funding requirements rise and the demand for commercial bank lending to finance government projects is certain to grow in the years ahead. On the basis of their recent performance, most regional and national financial institutions are in a good position to rise to the challenge.


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