The positive effects on Arab economies of higher oil prices from mid last year onwards and the ongoing structural adjustment programs in the non-oil countries saw Arab banks recording healthy returns in 1999, with few exceptions.
According to the Union of Arab Banks, the combined net income of the 100 largest Arab banks rose by 10.2 percent to $8.3 billion, while their combined assets increased by 4.2 percent on their 1998 level to $526.3 billion.
However, these assets remain smaller than the assets of any of the largest ten banks in the world. For example, the assets of HSBC Group alone were $569 billion last year.
Average return on equity for Arab banks stood at 13.9 percent, with return on assets and capital to asset ratios at 1.58 percent and 11.3 percent respectively.
The top Arab bank in the region in terms of equity, the Arab Banking Corporation in Bahrain, ranked as number 161 among the world's top 1000 banks in 1999, followed by Saudi American Bank, which ranked 166, and Saudi Arabia's National Commercial Bank (which has not yet released 1999 results) with a rank of 169 in 1999, down from 160 in 1998.
According to Euromoney's Top 100 Arab Banks survey, the seven largest Tunisian banks recorded the highest increase in combined net income in 1999, up 84 percent, followed by the top Bahraini and Egyptian banks with earning growth of 30.5 percent and 25.2 percent respectively.
In the Gulf, the banking sectors of Kuwait and Qatar fared well, with the top banks in each country posting profit increases of 10.8 percent and 5.7 percent respectively.
In Saudi Arabia, the combined pretax profits of the nine banks (excluding National Commercial Bank, which had not yet released 1999 results) rose by a modest 1.5 percent, biased downwards by the Saudi American Bank's (SAMBA) 24 percent decline in pretax profits because of high SAMBA-USB merger related costs of $243 million.
Excluding Samba results, the combined pre-tax profits of the eight remaining banks rose by 8 percent in 1999. Other Gulf markets did not do so well; top Omani banks posted the steepest decline in pretax profits last year, down 12.9 percent, while the top 17 banks in the UAE recorded a more moderate decline of 8 percent.
The two largest Jordanian banks (the Arab Bank and the Housing Bank for Finance and Trade) showed a modest decline of 3 percent last year.
A comparison of return on equity ratios, a key measure of profitability, places the five top Qatari banks in the lead with 17.7 percent average return on capital in 1999, followed closely by the largest fourteen Egyptian banks which saw their average return on capital rise from 16.2 percent in 1998 to 17.5 percent in 1999.
Last year was also a good year for Tunisian banks where a combination of relatively low capitalization and healthy profit growth for the country's seven largest banks in the top 100 listing boosted return on equity from a 10.6 percent average in 1998 to 17.1 percent last year.
Return on equity for the seven Lebanese banks fell to 16.9 percent in 1999, from 18.1 percent the year before. The average ratio for the thirteen Bahraini banks, the nine Kuwaiti banks and the eight Omani banks stood at 10.5 percent, 11.6 percent and 12.2 percent respectively.
The return on equity ratio for Saudi banks, the eight UAE banks, and the two largest Jordanian banks retreated slightly to 15 percent, 10.8 percent, and 9.7 percent respectively. Bank Internationale Arabe de Tunisie enjoyed the highest return on equity ratio of 54.9 percent, followed by National Societe Generale Bank of Egypt, at 28 percent, Al Rajhi Bank of Saudi Arabia, 27.1 percent, Misr International Bank, 26.6 percent, and Saudi Hollandi Bank, 25.7 percent.
The banking sector's concentration ratio measured by the market share of the top five banks in the region is relatively high. In Saudi Arabia, two banks, the Saudi American Bank and the National Commercial Bank, hold almost 50 percent of the sector's assets.
The National Bank of Kuwait and the National Bank of Bahrain each holds 30 percent of their country's respective banking assets. Egypt's four state banks have 50 percent of total assets and control most of the retail network, while in Jordan, the top 5 banks control 80 percent of the assets.
Management of Arab banks has so far been emphasizing mainly asset size and market share, believing that the large balance sheet on the long haul would guarantee competitive advantage. Instead, management objective in the new millennium should be to maximize shareholders value.
This necessitates shedding off businesses where the returns do not cover cost of capital and allocating more resources to those activities that add value over time.
Enhanced profitability could also be achieved by reducing operating expenses through the effective use of modern technology such as the Internet and seek consolidation with banks in the domestic market or abroad.
Internet banking places emphasis on two factors, customer awareness and the accessibility they have to the Internet, neither of which the region has been particularly successful at.
If business becomes a click of a mouse away, Arab banks will have to understand their products and their customers' needs much better and invest more in technology if they are to survive the onslaught of new competition.
And if they were too slow to adapt, the consequences could be deadly. Look at what had happened in just four years to share trading on the World Wide Web and note that the stock market with the highest proportion of Internet trading is not in New York but in Seoul.
Consolidation would reduce operation cost, minimize duplication, boost efficiency, spread the huge technology costs over a bigger base and cross market products on a larger scale.
However, consolidation has to be planned for carefully and motivated strategically for it to be effective. Despite the few consolidation deals carried out in the region in the last two years, mergers and acquisition activity remains sporadic.
It seems Arab banks are unlikely to pursue serious consolidation activity unless they are forced to do so by their respective monetary authorities. — ( Jordan Times )
By Henry T. Azzam—Chief Economist and Managing Director, Middle East Capital Group
© 2000 Mena Report (www.menareport.com)