Despite much uncertainty in the international money markets following the event of 11 September, Gulf banks, are poised to enjoy a period of healthy growth.

By Moin A Siddiqi

DDespite the ongoing regional geo-political instabilities following the US-led war on terrorism, the Arab financial system remains basically healthy. Profits at some of the region’s top-tier institutions are set to soar, according to some experts.
Throughout the Gulf Cooperation Council (GCC) region, oil revenues have powerful “multiplier effects” on economic activity and overall strength in the banking sectors. Firmer oil prices over the past two years have boosted governments’ fiscal and external account positions. This in turn, has improved the asset quality of Gulf banks and stimulated economic growth. As higher liquidity has encouraged increased private consumption and business spending. The balance sheets of prime Arab banks indicate continuing healthy growth in assets and earnings for 2001, albeit lower than the previous year.
The January-September 2001 earnings figures of top-tier banks were particularly buoyant. The Jeddah-based National Commercial Bank reported net profits (before provisions) of $461 million (up 31.7 per cent). The Saudi American Bank (SAMBA) and Riyad Bank declared growth in profits of 13 per cent, and 15.3 per cent, respectively. Whilst, National Bank of Kuwait also reported record net operating profits of $275 million for the first three-quarters.
Banks will continue to show
strong liquidity, modest growth
and strong profitability
However, regional business activities were reported subdued in the fourth-quarter, especially in areas of international trade, corporate finance and asset management, reflecting the global economic downturn and highly volatile US stock markets. Jouan Salim, under-secretary at the Abu Dhabi Finance Department, said: “Expectations before the events in the US and Afghanistan indicated that banks’ profits would grow by at least 10 per cent this year. But these events will have negative effects on performance in the last quarter, although most banks have already issued encouraging results.” And, Jammaz Al Suhaimi, deputy governor of the Saudi Arabian Monetary Agency (central bank) confidently told The Banker journal: “Notwithstanding the current worldwide economic slowdown and declining interest rates trend, the Saudi banks are expected to show a strong performance during the last quarter. Banks will continue to show strong liquidity, modest growth and strong profitability. We expect the year to year growth of profits for 2001 to be in excess of 10 per cent.”
The prime Arab banks with stronger liquidity and mainly local customer deposits, are well protected from volatility of the international capital markets. Standards & Poor’s comments: “The tightening of liquidity globally does not affect Gulf banks.”
In Egypt, the second-largest Arab market (after Saudi Arabia), financial institutions were hit by economic slowdown in 2000/01 and a liquidity crunch. The profitability of the “big-four” state banks — National Bank of Egypt, Banque Misr, Bank of Alexandria and Banque du Caire — (together controlling two-thirds of total banking assets) is still undermined by high levels of bad debts and provisioning charges. The private-owned Commercial International Bank remains the most efficient and profitable of Egyptian banks, thanks to diversified product portfolios. Whilst, regional security problems have affected retail banking markets in Jordan and Lebanon.
The GCC countries’ interest rates (pegged to the US money market rates) have fallen substantially over the past year. This has resulted in lower and declining margins in the industry. The Moody’s Investors Service comments: “Following the fall in interest rates, the spread between the return on liquid assets (usually placed with foreign banks) and the cost of funding has widened, negatively impacting banks’ earnings.”

Read the full story in the February 2002 edition of The Middle East Magazine

Copyright © IC Publications Limited 2001. All rights reserved. No part of this site may be reproduced or transmitted in any form by any means or used for any business purpose without the written consent of the publisher. Whilst every effort has been made to ensure that the information contained herein is as accurate as possible, the publisher cannot accept responsibility for any consequences arising from its use.

Back to the top
Contents