• Home
• Financial Services
• News Article

Sep 11 2011

more articles from

EU banks vs gulf banks

With pockets of opportunities hard to find, Audi Capital recommends piling into Middle East North Africa banks.

The regional financial services industry stands in sharp contrast to the international global banking sector. With the mighty Bank of America, Citibank, Goldman Sachs under pressure, and European banks looking absolutely dicey due to their overwhelming exposure to Greek and other sovereign EU debt, the regional banking industry looks safe as houses in comparison.

The International Monetary Fund thinks European banks need $287-billion in new capitalisation. For the most part, MENA banks do not suffer from capitalisation issues.

Audi Capital , a subsidiary of Lebanon-based Bank Audi , offers its reasons for its optimism about MENA banks:

• Stronger capital ratios in times where capital adequacy is most crucial. We note that the majority of MENA banks capital should classify as Core Tier 1 capital.
• Absence of exposure to sovereign debt. The MENA region benefits from low debt to GDP, with the key economies delivering continuous fiscal surpluses, driven by strength in natural resources.
• Higher profitability measured by a superior return on assets and strong return on equity.
• Improving asset quality with falling provisions. This is the opposite of what could occur in Europe over the coming periods with potential triggering of sovereign defaults on the banks balance sheets.
• Exposure to potential inclusion of Qatar and UAE to MSCI, as banks are among the largest constituents of the stock exchanges in Abu Dhabi, Dubai and Qatar.
• Lower need to tap the wholesale markets owing to stronger liquidity, in times of rising risk premiums.
• Sticky access to cheap cost of funds due to the high proportion of demand deposits.
• Immaterial exposure to international operations, limiting the risk of default contagion.

MENA banks benefitted greatly from strong government support during the global financial crisis in 2008 when regional governments shored up capital, and their stakes in banks to ensure that they do not collapse during the credit crunch.

As a result, Bank Audi says MENA banks are among the safest in the world "with minimal debt to GDP and very healthy core Tier 1 capital ratios."

Impressive Growth
GCC banks have grown at an impressive 28% year-on-year and 4% in a tough second quarter.

On an aggregate level, GCC banks witnessed healthy growth in the net interest income (+7% year-on-year) and exhibited a strong rise in non-interest income (+23% year-on-year), according to Global Investment House estimates.

Audi Capital is especially bullish on UAE, Saudi and Qatari banks. Apart from being generally well-capitalised, growth in banks in these countries is expected to be driven by government investment and consumer spending, with public sector salary rises benefiting economic growth and deposits.

However, not all banks in the Gulf are painted with the same brush. The results for most of Kuwait and Oman banks in the second quarter "offered a negative surprise with almost all banks in Kuwait exhibiting results much below our expectations with the exception of Burgan Bank ," says Global.

Commercial Bank of Kuwait offered the highest deviation from Global's forecast of Kuwaiti banks. Meanwhile, Bank Muscat and National Bank of Oman were the exceptions amongst Omani banks where the remaining banks exhibiting a strong negative deviation.

Indeed, a recent Moody's report notes that Omani banks face continued high credit risks due to single-party exposures, as well as their limited geographic diversification and high reliance on the oil-dependent domestic economy.

Meanwhile, an IMF report on Kuwaiti banks revealed that under a severe scenario the capital of eight (out of eleven) Kuwaiti investment companies could be wiped out due to insufficient capital buffers and exposure to risky assets.

Read report here: Failing Stress Tests

UAE Catching Up
While Kuwaiti and Omani banks are struggling, UAE banks are regaining their strength.

"UAE banks, particularly in Abu Dhabi, continue to be the most attractive valuation choice among GCC banks. UAE banks are currently trading at a PBV (2011E) of 1.0x compared to an estimated 2011 ROE of 14.9%, which is the highest (ROE in terms of PBV) among major GCC banks," says Bahrain-based SICO, which has a buy rating for National Bank of Abu Dhabi and First Gulf Bank .

"We expect that improving fundamentals of the local economy, and favourable developments in regulations in key sectors such as real estate, will strengthen domestic credit growth in the medium term," says SICO.

Saudi banks are also benefiting from low cost of funding, high efficiency and good pricing power.

In its recent report on the Kingdom's financial service sectors, ratings agency Standard & Poor's praised Saudi Arabian Monetary Agency for supporting the banks, especially after the 2008 crisis.

"In our opinion, the poor performance of international financial markets since 2008, local credit events in 2009, and prudential initiatives introduced by the regulator, the Saudi Monetary Agency (SAMA) , have led the banks to revise their strategies in favour of plain vanilla domestic banking activities, and to strengthen their risk management practices," says S&P.

"They have allocated their robust operating revenues both to build up capital positions and to increase provisions for coverage of bad loans to conservative levels above 100%. From a rating perspective, these cushions and the banks' resilient revenue generation underpin their credit quality, in our view enabling them to face both expected and unexpected losses."

Similarly, banks in Qatar are raking in the gas-infused dollars, which has allowed the government to pump massive investments into the economy, and the private sector is also stepping up to play its part.

Loan growth in Qatar's banking sector continues to be above the loan growth in most other MENA countries.

"Public sector loan growth was 8% year-on-year (+1.1% month-on-month), while private sector lending increased 16% year-on-year (1.1% month-on-month)," writes EFG-Hermes in a recent report.

"Private sector loan growth picked up significantly over the past four months and current loan growth rates are well above 2010's average 7% year-on-year growth."

Stress Test
Banks of UAE, Saudi and Qatar are not only above regional average, but are also poised to beat their global peers. In a recent exercise by the European Banking Authority (EBA), eight European banks failed a recent stress test, especially the key criteria of holding 5% Core Tier 1 capital.

Though the result is generally positive, the results failed to assert confidence in the market with a substantial number of banks recording a Core Tier 1 below more realistic levels (i.e. 6-7%), notes Bank Audi .

Conclusion
Bank Audi says MENA banks are more than able to withstand a similar stress test. "We note that the majority of Tier 1 Capital for the MENA banks should qualify as Core Tier 1," says Bank Audi , adding that MENA banks have some of the lowest loan-to-deposit ratio in the world.

"We believe that banks in Europe and the US potentially offer deep value but with a material downside risk.... On the contrary we see the MENA banks more suitable for investors looking for less volatility and limited downside. Despite the richer valuations, we think that the MENA banks solid fundamentals, especially in KSA and Qatar, will support them to be materially less impacted than developed banks in the current environment. We believe the MENA banks offer a hedged investment in the global banking universe," says Bank Audi .

© alifarabia.com 2011