RBI’s study of the Middle Eastern banking
industry shows that the majority of the region’s main banks enjoyed
healthy retail profits in 2007. But the continued spread of credit
issues around the globe may result in a vastly altered picture by
the end of 2008, report Daniel Jones and John Hill.
Go deeper with GlobalData
Gulf Bank, which had $19.3
billion in assets as of 30 June 2008, announced on 25 October that
it had lost an unspecified amount on its derivative holdings as a
result of the sharp fall in the euro against the dollar in the
previous week.
This led to a raft of action in a region hitherto considered to
be relatively well-insulated from the financial crisis. The Kuwaiti
central bank promptly guaranteed all bank deposits, just days after
stating that such action was not necessary.
Some depositors, spooked by the affair, withdrew money from Gulf
Bank in scenes reminiscent of those seen across Europe over the
past 12 months. RBI research shows that Gulf Bank had
$4.45 billion of deposits as of the end of 2007.
The trading loss is unlikely to be the last of the region’s
problems. Falling commodity prices are likely to have an impact on
the wider health of the region but more pertinent for the banks is
the prospect of a severe real estate downturn.
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By GlobalDataA possible slump
This is a view that has yet to fully take hold within the UAE
itself, though the possibility of a slump is now being
acknowledged. Sultan Nasser al Suweidi, governor of the central
bank of the UAE, said last month that “a real estate correction
could happen, but UAE banks are cushioned”.
RBI figures show that this is the case in terms of
group-wide loan to deposit ratios: few are severely over-leveraged,
with the National Bank of Abu Dhabi (NBAD) having the highest ratio
(119 percent) of the UAE’s five biggest banks as of June 30
2008.
Such ratios have been climbing steadily upwards, however, and
the central bank in Saudi Arabia, the Saudi Arabian Monetary
Agency, injected around $3 billion into the country’s banks on 21
October in an attempt to preserve the institutions’ ability to lend
effectively. On 14 October the Qatar Investment Authority made a
similar move, saying it would take stakes of 10 to 20 percent in
Qatari banks in order to encourage lending.
One notable divergence in Middle Eastern central banking policy
from that seen elsewhere is the importance of lending to support
infrastructure projects as opposed to consumer finance operations,
cited by both Qatar and Saudi Arabia upon their injections of
liquidity.
But the end of the property boom which has fuelled growth in the
Middle East for years will have an inevitable knock-on effect on
retail lending.
In September, HSBC cut forecasts for NBAD, noting that it was
the most likely bank to suffer as a result of a property downturn,
but adding in its note to clients that it did “not see any imminent
threat to asset quality”.
That corresponds with the RBI figures, which reveal
little sign of any impact in 2007, with the majority of the 20
non-Israeli banks featured posting healthy year-on-year rises in
retail profit.
Emirates NBD, now the largest bank in the Emirates, posted
similarly impressive figures for the first half of 2008, though
year-on-year comparisons have been skewed by the merger of Emirates
Bank International and National Bank of Dubai to create Emirates
NBD in July 2007.
The bank remains confident in the state of the property market.
In September, Jamal Bin Ghalaita, general manager of consumer
banking at Emirates NBD, announced a new home loan financing
initiative, noting “the Abu Dhabi real estate market is at an
all-time high”.
In contrast, Gary Dugan, chief investment officer and head of
wealth management EMEA at Merrill Lynch, speaking to RBI
sister publication Private Banker International in September, said
Dubai “could be looking at a property crash”, noting that over 10
percent of building projects in the emirate are now reportedly on
hold.
The creation of Emirates NBD is seen by some analysts as a
precursor to a wave of mergers in the United Arab Emirates. With
over 50 banks in total, the possibility of a downsizing of the
market is only likely to be increased by the prospect of a more
difficult retail banking environment.
“At this stage I’d say mergers are a very good choice for banks…
not necessarily for weak banks, but also for strong banks,” Suweidi
said in October.
Weathering the storm
The RBI table shows that UAE banks largely outperformed
their Israeli counterparts in the first half of the year, the
latter institutions all recording sharp drops in profit. But they
may be better positioned to weather the storm.
A recent note to clients from Dan Harverd, emerging markets
analyst at Deutsche Bank, suggested that “if the future of the
global banking system is higher regulation, partial but passive
government ownership, lower leverage and lower returns on equity,
then we would argue that the Israeli banks are already there.”
Speaking to RBI, Harverd said that the country’s
largest mortgage player, Mizrahi Tefahot Bank, had a similarly
conservative stance to lending, with the average mortgage
loan-to-value standing at 65 percent.
“Mizrahi has about a third of the mortgage market, so its data
is pretty representative for the market as a whole,” noted Harverd,
adding that it was “difficult to get approval” for the type of
adjustable rate mortgages that have caused such problems for banks
in the US and, increasingly, the UK.
Furthermore, in commenting on deposits, Harverd advised that
“there isn’t much switching of accounts in Israel; historically it
hasn’t been that easy to close accounts. Banks perceive their
retail base as pretty captive.
“What you are seeing at the moment is an attempt to get people
to move from short-term deposits into long-term deposits by
offering attractive long-term rates, but that’s such a small
percentage of the overall pie that it’s not a game changer in terms
of the overall market.”
Harverd believes these factors are likely to limit prospects for
greater competition even as banks across the globe seek to improve
loan to deposit ratios in light of the current climate.
From an Israeli point of view, those concerns are limited: the
RBI research shows that such ratios are, in a global
context, very low: 106 percent, 93 percent, 91 percent and 85
percent for Mizrahi, Bank Hapoalim, Bank Leumi and Israeli Discount
Bank respectively.
Bank Hapoalim, the largest bank in the Middle East according to
the RBI research, has correspondingly displayed the
highest appetite for overseas expansion, agreeing last December to
purchase a 75.8 percent stake in Ukrainian Innovation Bank.
But that purchase was suddenly cancelled on October 26 by
Israeli regulators, mindful of the Ukranian financial crisis which
has seen the country forced to turn to the IMF for a loan of up to
$15 billion. It was a move that seemingly confirmed Harverd’s
thesis.
“What you have is a fundamentally well-regulated and
conservative system,” he said.
