Forums » News and Announcements
Banking risk in the Arab world
-
Banking risk in the Arab world
Khaleej Times - [7/11/2011]
The past three years have witnessed a seismic shift in the risk paradigm of Arab banking. The most obvious is the escalation of geopolitical risks with the overthrow of Hosni Mubarak and Ben Ali regimes in Egypt and Tunisia, unrest in Bahrain, a popular revolt and NATO bombing campaign in Libya, political impasses in Lebanon and de facto civil war in Syria and Yemen.
This is the major reason risk spreads for Arab banks in the international money and syndicated loan market have rose while bank valuation multiples have fallen in the regional stock market. The market finally differentiates among vastly different sovereign risks in the credit default swap market but MENA banks have lagged the Morgan Stanley emerging market stock indices in 2011.
This is because, apart from geopolitics, the shocks of multiple regional corporate black swan credit events (the $23 billion Saad/Al Gosaibi scandal, the sukuk default in Kuwait and the failure of Bahrain OBU’s) still haunts the global capital markets.
GCC banks (with the exception of Bahrain) are the strongest credit risks in Arab finance. The leading banks in the GCC, with a few exceptions in Qatar and Saudi Arabia, exhibit some of the Basle strongest Tier One capital ratios in the emerging markets and have strategic “too big to fail” government support and shareholdings.
Yet even the biggest GCC banks have exposure to the collapse in the property bubble, distress among corporate borrowers hit by the regional credit crunch, liquidity and funding risks in the interbank market. There has been a tangible increase in the cost of debt for various GCC and Arab borrowers in the euromarkets that will impact operating margins, balance sheet and earnings growth, particularly for banks that relied on wholesale funding in the offshore capital markets to finance the growth of domestic loan books.
Saudi, Kuwaiti, UAE and Qatari banks exposed to Egypt have been hurt by the closure of the Cairo stock market, the creeping devaluation of the Egyptian pound, the plunge in economic growth, loan growth the fee income due to protracted political uncertainties even after the end of the Mubarak era.
Even though some of the world’s most profitable and best capitalised banks hail from Saudi Arabia, the kingdom’s highly liquid loan-deposit ratios and the banking systems exposure to the largest, most vibrant consumer economy in the Arab world and low relative need for external funding have not prevented a valuation derating for Saudi banks in the stock market. This valuation rerating has been mirrored in Kuwait, Bahrain, Oman and the UAE, where external funding, liquidity ratio and credit concentration risks are far higher.
The leading banks in the GCC, almost without exception, enthusiastically embraced pan-Arab or pan-MENA expansion as a strategic vision, even seeking banking franchises in frontier, unstable markets like Sudan, Iraq, Palestine, Libya and Syria. This has exposed them to country risk and contagion risks the pan-Arab banking model implicitly transmits from cross-shareholdings and balance sheet exposures.
GCC banks will aggressively seek to reduce risk exposure in the years ahead. I can easily envisage a new focus on organic deposit growth, less reliance on fickle offshore funding markets (the euro-MTN debt explosion enabled so many banks to own empty office and luxury flat towers in the desert!), a high proportion of low risk, liquid US Treasury debt in loan books.
Several regional banks will need to abandon their pan MENA ambitions off, balance sheet exposures and unwind credit concentration in the property market. Banking risk in Arab finance is fickle, complex, amplified by politics and poor disclosure/governance models. Risk is a four letter word in Arab banking. So is ruin.