The banking industry in the Middle East is confounding pessimists and enjoying a broad-based growth surge.
|
|
|
When the Middle Easts major banks began announcing their 2003 results, many analysts were predicting that the reports would make grim reading. They were spectacularly wrong. The war in Iraq failed to derail the regions banking sector, which is looking forward to another year of solid profitability on the back of rising oil prices, economic growth and strong foreign investment flows. In fact, banks in countries such as Kuwait are forecast to benefit from their proximity to the rebuilding process in Iraq, helping them find a way out of their narrow domestic market.
Investment continues to pour into other markets, in particular Kuwait, Bahrain and Qatar, which has recently become the worlds most affluent country, with an annual per capita income of some $54,000. Most of the region is seeing a rapid expansion of retail banking and booming local stock markets, factors that bode well for sustainable growth of the banking sector in the near term.
There is a substantial pool of liquidity in the six GCC countries, says Aftab Siddiqui, managing partner of London-based consultants InnoValue Consult. The regions stock markets capitalization increased by some $30 billion last year, and further growth is anticipated for 2004. People are holding large cash reserves and looking for investment opportunities. As a result, banks are able to raise a lot of funds on the liability side, and if they provide well-structured products, they will be able to cash in on this boom, he says.
The key risk, as always, is that these countries are almost totally dependent on oil revenues. This lack of diversification, apart from the growing forays into Islamic finance and, in the case of Dubai, banking services for high-net-worth individuals, leaves the banks in the region exposed to any abrupt decline in crude prices. This, however, is not seen as a short-term problem.
Market forecasters gloomy predictions for 2003 were based on the general slowdown in the first quarter, the war in Iraq and the climate of low interest rates. As it turned out, low interest rates fueled growth in retail borrowing, while burgeoning demand from China for oil resulted in a surge in crude prices and regional stock markets turned in a strong performance.
The Saudi banks were the biggest beneficiaries of buoyant local market conditions, and all the kingdoms bankswith the exception of Samba Financial Groupreported strong results, says Robert Thursfield, credit analyst at Fitch Ratings. Banks continue to benefit from surplus liquidity caused in part by surging oil prices, and this is reflected in the robust 9% growth in deposits within the banking system. Overall, the Saudi banking industry remains in robust shape and is well positioned to deal with any deterioration in the operating environment or increases in competition, he notes.
Expansion in some underdeveloped banking markets such as Syria, Libya and Iraq will also provide banks with a new source of expansion, according to Emmanuel Volland, credit analyst at Standard & Poors. The development of Islamic finance will also contribute to the strengthening of the positions of Bahrain and the United Arab Emirates [UAE] as major regional financial hubs, while providing smaller players with an alternative to consolidationthat is, specialization within a niche strategy, he says.
The ratings agency sees a booming high-yield and low-risk consumer lending business as another important factor supporting Gulf banks profitability and ultimately the ratings on the banks, particularly in Saudi Arabia. With the growth in consumer banking and the expansion of property investment, Saudi banks are expecting their profits to grow by about 16% in 2004, slightly above last years performance.
The Middle East financial services industry is dominated by Saudi Arabia, which claims the top three spots in the ranking of the regions banks. The kingdom is also paving the way for financial sector reform through the approval of the long-awaited Capital Markets Law (CML) in June of last year, a measure that Hamad al-Sayari, governor of the Saudi Arabian Monetary Agency (SAMA), described as a significant qualitative leap in the history of the Saudi capital markets. The new law, which sets up a new industry regulator, aims to provide an integrated regulatory framework to attract investment and boost confidence in the system through increased transparency. The law also creates a formally structured insurance sector and allows foreign banks to set up as non-bank intermediaries. But business leaders have been expressing their concern over the delay in finding a chairman to head the new Capital Markets Authority, a situation they say is holding up the expansion of the countrys financial markets.
International banks have been quick to react to what is seen as a clear signal that the Saudis intend to open their market to foreign competition. Late last year SAMA granted Deutsche Bank a foreign license to start an investment banking operation, an event that completely overshadowed the entry of three regional banks, from Kuwait, UAE and Bahrain, into the Saudi market.
Global Banks Circle Saudi Market
HSBC, the worlds second-largest bank after Citigroup, is also riding in on the liberalization wave. The British bank, which already holds 40% of the highly profitable Saudi British Bank (SBB), has also been granted an investment banking license and plans to set up a separate operation to SBB. Other European banks are waiting on the sidelines to see how the process develops in the run-up to the enactment of the capital markets law. Crdit Agricole and ABN AMRO, which already have close working relationships with Saudi banks through joint venture agreements, are believed to be keeping a close eye on opportunities in the kingdom. Notably lacking, however, is any significant US presence in the regions largest market, Citibank having withdrawn from its technical management agreement with Saudi American Bank, which is now known as SAMBA Financial Group.
Saudi banks are generally unassailable in their domestic retail market, but with the opening of the capital markets there is likely to be a scramble for business by the global players. IPOs alone could generate $2 billion a year in new capital, according to analysts forecasts. Other areas ripe for expansion include the corporate bond market, retail brokerage and institutional asset management.
Barring unforeseen problems such as war or civil unrest, this years outlook is quite positive for Middle East banks, says Siddiqui. Oil revenues are better than originally forecast, and with this huge inflow of liquidity a lot of banks are looking at modernizing their structures, and they are spending heavily on IT. Nevertheless, the environment remains highly competitive, he adds.
Jules Stewart
