Private equityPolitical unrest andmore subduedmarkets encouragea longer term viewPage 2

Inside »

Gulf banksLending is startingagain but notnecessarily to theprivate sectorPage 2

North AfricaThe eurozonecrisis has forcedEuropean banks tosell regional assetsPage 3

LebanonDownward patternis impossible todissociate from theturmoil in SyriaPage 3

FT SPECIAL REPORT

Arab World Banking & FinanceThursday December 13 2012 www.ft.com/reports | twitter.com/ftreports

Western banks underincreasing pressure athome are cutting backtheir Arab world opera-tions, part of a dramatic

reshaping of the regional financiallandscape that is creating opportuni-ties for local banks and for companiesfrom Asia and elsewhere.

Oil money flooding into the Gulfpetro-states has left many governmentand private institutions rich incapital, but they – and their overseasrivals – must contend with theextraordinary political forces thathave swept the region over the pasttwo years. The volatility has alreadycreated troubles for companies inareas such as private equity, whichare struggling at times to sell boom-time pre-Arab Spring investments fora profit.

Faced with this mixed and fast-

evolving picture, the finance industryin the Arab world is changing quickly– and in a way that is yielding clearwinners and losers.

“We have seen a necessary shiftaway from western banks to local andAsian banks and governmentfinance,” says Farouk Soussa, chiefeconomist for the Middle East for Citi-group, the US bank. “We expect to seea continued trend of Asian banksentering the market – and also anexpansion in the local bank sector.”

The retreat of some western banksshows the size and suddenness of theshifts taking place. Faced by a combi-nation of political turbulence and theneed to generate capital to deal withthe international financial crisis,some western institutions havedecided the best solution is to selltheir regional interests.

The trend is particularly marked in

north Africa, which is still convulsedby the aftershock of the toppling ofthree of its five leaders over eightextraordinary months last year. InEgypt, leading European banks are ontheir way out as they grapple with thefallout from the eurozone crisis.

Société Générale of France is closeto selling its majority stake in itsEgyptian subsidiary NSGB to QatarNational Bank for about $2.6bn, whileBNP Paribas is expected to offload itsEgyptian retail arm for between$400m and $500m.

In Libya, where there were ratherfewer western banking interests inCol Muammer Gaddafi’s tightly-con-trolled economy, his overthrow hasopened up new opportunities forbanks from other parts of the region.Qatar National Bank this year boughta 49 per cent stake in the Bank ofCommerce and Development, one of

Libya’s largest private banks, whileDubai’s Arqaam Capital acquired AlRashad Finance and ManagementAdvisory, a Libyan financial servicesbusiness.

Many analysts expect a furthershake-up in the financial sector asgreater competition follows the col-lapse of authoritarian and cronyistregimes, forcing banks to merge tosurvive. One likely candidate for thisis Tunisia, whose more than 20 banksserve a population of a little morethan 10m and have a huge problemwith unpaid loans.

Another big geopolitical change isthe inexorable widening of the so-called New Silk Road, which is lead-ing financial institutions from theMiddle East’s venerable trading part-ner countries in Asia to the oil-richGulf and the surrounding region.

The growing modern-day relation-

ship is founded on a mix of proximity,Asian states’ appetite for Gulf oil andgas and the increasing Gulf demandfor Asian company products andknow-how – exemplified by a contractlikely to be worth $40bn or more for aSouth Korean-dominated consortiumled by Korea Electric Power to buildand run the United Arab Emirates’new civil nuclear programme.

Four-fifths of Chinese investorsexpect further trade growth with theMiddle East and north Africa, whiletwo-thirds think Chinese investmentin the region will also increase,according to a survey published inOctober by Latham & Watkins, theinternational law firm.

“Before, European banks were thekey source of foreign funding for theinvestment programmes,” says Mon-ica Malik, the chief economist of

Continued on Page 2

Regionalcommerceundergoesfast changeFinancial services in Arab countriesmay notalways be straightforward but appearmoreinviting than in thewest, writesMichael Peel Window on Dubai: changing contours are offering tempting prospects for some, but they have stymied others Alamy

HSBC’s decision this yearto stop offering Islamicproducts in many of itsmarkets has sent shockwaves through the Gulfregion, one of the globalhubs for Islamic finance.

The move underscoredthe difficulties facing eventhe largest conventionallenders that have tried tolure new customers to bankin compliance with Muslimsharia law.

While the Islamic financeindustry is forecast toexpand at a tremendouspace, a broader questionis emerging as to how tomake Islamic banking prof-itable.

“The industry is still ingrowth mode but where doyou make money?” asksone Dubai-based Islamicfinance banker.

Ernst & Young estimatesthat assets under Islamicbanking – which rejects theacceptance of interest anddemands that products aretypically asset-backed – areset to top $1.8tn globally bynext year, up from the$1.3tn of assets held in 2011.

But, as the world’s big-gest international invest-ment banks are forced todownsize, cut jobs andchange their business mod-els, their Islamic financearms are also facing theaxe.

HSBC said in October itwould cease to offer Islamicproducts outside its whole-sale banking operations inthe UK, the United ArabEmirates, Bahrain, Bangla-desh, Singapore and Mauri-tius, as it reviewed its glo-bal business.

Now focused on SaudiArabia and Malaysia, thebank said the decision“demonstrates the group’scommitment to drivinggrowth and improvingreturns by restructuringor exiting businesses thatdo not meet its investmentcriteria”.

Since then, in Dubai, Mor-

gan Stanley is the latestbank to lose its Islamicfinance expert.

Barclays and DeutscheBank have also lost thearchitects of their GulfIslamic banking businessessince the onset of the globalfinancial crisis.

Eyes are focused onStandard Chartered, whichoffers a large-scale Islamicbanking unit like that ofHSBC.

“You are not going tohave specialists sitting inthese banks,” comments theDubai-based Islamic banker.

“You do not need a dedi-cated Islamic structuringteam.”

Retail Islamic banking isprofitable for internationalbanks but the landscape isalready extremely competi-tive, bankers say.

The Gulf’s local Islamicbanks have so far been bet-ter placed to capture busi-ness.

The downsizing of inter-national expertise inIslamic financein the regionis creating an even greaterchance for local lenders totry to gain market share.

HSBC’s move “representsan opportunity for local,

indigenous firms toprogress the industrytowards the next stage ofits evolution”, says IqbalKhan, one of the architectsof HSBC’s original Islamicbusiness.

He is now chief executiveof Fajr Capital in Dubai.

Many of the region’s pio-neers of Islamic finance,who helped to build the

sharia practices at theworld’s biggest investmentbanks, are working withboutique Islamic firms outof mainstream banks.

HSBC’s decision has reo-pened the debate over thecredibility of conventionalbanks operating Islamicunits.

Last year, Qatar’s centralbank forced the closure ofIslamic banking units by

ordering a separation ofsharia-compliant lendersand conventional lenders.

As a result, HSBCAmanah, the bank’s Islamicbanking arm, was forced toshut up shop just monthsafter opening in Qatar.

“The credibility issue, is‘are you an Islamic bankor a conventional bank?’It is forcing people to makechoices,” observes TiradMahmoud, the chief execu-tive of Abu Dhabi IslamicBank.

“Customers will alwaysvote with their money,” headds.

While retail customersare more concerned aboutthe Islamic credentials ofsharia-compliant banks,companies are less likely todifferentiate, he says.

International banks canusually make money fromcorporate lending and thensyndicating the loans toearn a margin.

But other activities, suchas managing Islamic bonddeals, are not as lucrative,bankers say.

Despite the optimism ofErnst & Young’s forecasts,AT Kearney, the manage-ment consultancy, pointedin May to a slowingin growth of the industry.

“As competition rampsup, and early warning signsshow growth slowing down,Islamic financial institu-tions have plenty of work todo,” the group said in areport.

“Whether the strategy isto focus on niche position-ing, compete with conven-tional banks head on, ora blend of both, sustaininggrowth will require mostIslamic banks to achievegreater efficiency across thevalue chain.”

While both internationalbanks and local Islamicbanks face difficulties inmaking to money from theindustry over the longterm, some still believethere is a good dealof potential.

“Across the Gulf, Islamicfinance continues to growand has passed the criticalmass stage,” says a seniorIslamic banker in Dubai.

“It has dynamic momen-tum and society now is get-ting used to the Islamicproposition.”

Large groups struggle to makemoney out of sharia complianceIslamic finance

Local institutionsappear well-placedto capture business,writes Camilla Hall

The debate overthe credibility ofconventional bankswith Islamic unitshas been reopened

The haj at Mecca: Islamic finance is set for big expansion AFP

Asian adventNew arrivals fromChina andelsewhere start tochange landscapePage 4

2 ★ FINANCIAL TIMES THURSDAY DECEMBER 13 2012

Arab World Banking & Finance

EFG-Hermes, the invest-ment bank. “Now Asianbanks are playing a largerrole, especially in thehydrocarbon and petro-chemical sectors.”

Dubai’s sprawling JebelAli industrial free zonealready plays host to doublethe number of Chinese busi-nesses it did five years ago.

Amid this growth, institu-tions, including Industrialand Commercial Bank ofChina and the AgriculturalBank of China are estab-lishing a presence in theMiddle East to support theincreasing number of theircompatriot companies doingbusiness there.

The most bullish esti-mates suggest that tradebetween China and theUAE alone could more thantreble to about $100bn overthe next three years –although a good part of thatis linked to the high oilprice and rising Chineseenergy demand.

Yet, even as the changingcontours of Arab worldfinance are offering tempt-ing prospects for some, theyhave stymied others whohave taken strategic wrongturns – or simply been inthe wrong market at thewrong time.

As western banks drawback, some of their Gulfrivals are not surging for-ward as they would likebecause they are recoveringfrom their own financialcrisis. Deposit levels andcredit books are growingbut institutions in the sixGulf Co-operation Council(GCC) countries are clear-ing up bad boom-time loansand issuing new lending tothe private sector sparingly.

While regional bankshave had some success intaking international bond

issue business away fromtheir foreign competitors,the market for Gulf shareissues remains sluggish.While oil-fuelled sovereignwealth funds have bigmoney to invest, they con-tinue to place much of itoverseas.

The Arab world’s emerg-ing private equity industryhas found the last couple ofyears particularly hardgoing as it grapples withfalls in the values of invest-ments it made during thelast years of the boom inthe mid-2000s.

Private equity executivesare paying more attentionto portfolio management,realising that they mayhave to hold on to assets forlonger than they wouldhave liked.

Political instability hasincreased the attractivenessof those countries not in thegrip of uprisings or armedconflict – such as Morocco,the UAE, Saudi Arabia andTurkey.

Another area seeing itsshare of growing pains isIslamic finance, where somecompanies that piled in towhat seemed like a certainboom area are puzzling overhow to make money.

HSBC’s surprise decisionthis year to stop offeringIslamic products in many ofits markets sparked debateon how the sector can turna profit.

For all these nuances andcomplications, many partsof the Arab world remainattractive markets, withgross domestic product inthe GCC estimated to rise5.6 per cent this year,according to an Interna-tional Monetary Fundreport in October.

Investment in sectorssuch as infrastructure isseen as a good bet, withhuge needs in many statesand new business expectedto emerge in countries nolonger under the yoke ofdictators who stifled devel-opment.

So while Arab worldfinancial sectors may not bealways be straightforward,predictable or low-risk, con-ditions there often still lookmore inviting than the eco-nomic permafrost envelop-ing much of the westernworld.

Continued from Page 1

Regionalbusinesschangesfast

For Gulf banks, 2012 provedto be a year of recovery – toan extent.

Deposits and credit booksgrew, but problem loanscontinue to drag on theindustry.

“Overall, the picture isquite positive when youlook at how banks havegrown over past fewmonths,” says Cyril Gar-bois, head of the MiddleEast financial institutionspractice for consultants ATKearney.

With big banks in the six-member Gulf Co-operationCouncil increasing theirloan books by 10 per cent ormore, Mr Garbois sees theindustry gaining a morepositive outlook.

“We are back on a trackof growth. Clearly, the 2008-2010 dip is now behind us,”he says.

But while the hangoverfrom the financial crisis isstarting to clear, the indus-try remains far from fit.Banks that are starting tolend again are not necessar-ily choosing to lend to theprivate sector.

“There is still a fundingissue for small companiesand for a lot of non-govern-ment entities that are allstruggling to get funding,”says Kearney.

“Corporate loans aregrowing but not enough toserve the needs of the pri-vate sector.”

Indeed, investment houseKuwait Financial Centre, orMarkaz, says credit growthis up on the “very low lev-els” of the past few years,but new loans remain along way off the 30 per cent-plus experienced before theregion’s financial crisis.

According to Markaz, thenet income of 60 banks inthe region in the first threequarters of 2012 rose byonly 7 per cent, on 13 percent growth in deposits anda 14 per cent hike in loans.

“In spite of decent creditgrowth, the bottom line is

muted due to provisioning,”says Raghu Mandagolathur,head of research at Markaz.

Markaz puts provisionsamong these banks as ris-ing by 18 per cent in thefirst three quarters.

These clouds have ledGulf banks to underperformthe broader markets.

Mr Mandagolathur alsopoints out that the Stand-ard & Poors GCC bankingindex has fallen 2.3 per centso far this year, after drop-ping 7 per cent in 2011.

So, by that metric, theindustry is underperform-ing the rest of the marketas S&P’s broader compositeindex indicated returns of 1per cent in the year to date.

Problem loans promptedMoody’s, the rating agency,this month to downgradethree Dubai banks, placinga fourth on watch for a pos-sible downgrade.

Moody’s lowered long-term ratings for EmiratesNBD, Commercial Bank ofDubai and Mashreqbank,while Dubai Islamic Bankwas placed on review.

Explaining the move,Khalid Howladar, a seniorfinancial institutions creditofficer in Moody’s Dubaioffice, says these banks’ ele-vated problem loan levelsand low loan-loss coveragelevels were “persistentlyweaker than regional andglobal peers”.

The rise in some non-per-forming loan books has notdimmed a broader recovery

in profitability and shareprices in some markets.

“Banks have been goingthrough a cleaning upphase for three years nowand hence may be poised toincrease their willingness toreturn to risk taking in2013,” says Mr Mand-agolathur of Markaz.

“However, with distressbeing prevalent amongtheir clients, they may findthe going tough.”

It is not only local banksthat are facing difficulty.With equity marketsremaining subdued, inter-national banks are findingthe going tough.

Amid broader global costcutting in the investmentbanking industry, manyinternational names areparing back their staffcounts in the region.

Sovereign wealth fundscontinue to make purchasesabroad but the poor per-formance of stock markets –despite a brief spike in thespring of 2012 – markedanother frustrating year forfinancial services in theGulf.

Raising debt on capitalmarkets remains one of themain regular sources ofnourishment for investmentbankers in the region.

Sovereign government-re-lated issues and financialinstitutions are continuingto tap bond markets butregional banks are increas-ingly taking business awayfrom foreign institutions.

“There is a huge domi-nance of local banks in themarket. They are gettingmore mandates on interna-tional bond issues,” saysRichard O’Callaghan, part-ner at law firm Linklatersin Dubai.

Banks lending to entitiestend to be awarded bondmandates as a result. “It ispay to play,” Mr O’Calla-ghan says.

Linklaters says it hasseen increasing levels ofactivity in equities work inthe region recently.

After a tough couple ofyears, when planned IPOsare failing to get off theground, these mandatesrepresent “glimmers oflight”, says Mr O’Calla-ghan. “But these are onlyglimmers. We have notreally turned the corner.”

Hangover starts to clearbut lenders lack fitnessGulf banks

Simeon Kerr reportson a sector that isunderperforming thebroader markets

Many parts of theregion remainattractive markets,with GDP on courseto rise 5.6 %

For the region’s fledging pri-vate equity industry, theonset of the Arab uprisingshard on the heels of a globalfinancial crisis has made for a

tough few years.Valuations of the investments held

by the slew of new Middle Easterncompanies set up in the mid-2000shave plummeted after the creditcrunch and western bank meltdownswere followed by the popular revolu-tions that have swept the region fromTunisia to Bahrain.

In the new reality of an unpredicta-ble political future and more subduedequity capital markets, private equitygroups are having to work harder toincrease the value of their invest-ments to generate returns.

“As we think about the businesscycle, it was pretty clear that it willtake longer for us to exit our transac-tions,” says Abdalla Elebiary, manag-ing director at Citadel Capital, theEgyptian private equity group. “Weneed to hold on to our platforms[investments] longer to make sure wesell at the right part of the cycle.”

With that in mind, the region’s com-panies are trying to make sure thatthey are more geared towards portfo-lio management, given that they mayhave to hold on to their assets forlonger periods.

Adding real value to the businessesthey acquire has become central totheir ability to exit, as internationalinvestors have been unsettled bypolitical unrest.

It also means that regional compa-nies are trying to pick investmentthemes that can be applicable over alonger period, as opposed to buys thatcan be turned around to make a quickreturn.

While the Arab uprisings haveplayed a role, some managers say thatlonger holding periods are the normnow globally. “In private equity ingeneral, holding periods are gettinglonger – it’s back to basics,” says Mus-tafa Abdel-Wadood, chief executive atAbraaj Capital, the emerging marketprivate equity house in Dubai.

“The environment in terms of theArab spring . . . the short-term visibil-ity . . . does not lend itself to exits andthere is no pressure to exit at thewrong time.”

Mr Abdel-Wadood says when mar-

kets are soft, it is the time to look forbuying opportunities as opposed toseek to sell assets.

Amid recent unrest from Egypt toBahrain, some specific sectors andcountries have caught the eye ofregional private equity groups. “TheArab spring has restated the safehaven markets,” says Karim Souaid,managing partner at GrowthGate, inBahrain. The group is seeking invest-

ment opportunities in Morocco, theUnited Arab Emirates, Saudi Arabiaand Turkey. They are seen as rela-tively stable compared with some oftheir neighbours.

While geography is driving deci-sions at GrowthGate, consumer goodsand retail are on the radar of Abraaj,as Gulf government spending tricklesdown into consumer demand.

By contrast, companies such as

Egypt’s Citadel are more focused onthe infrastructure and energydemands it sees in its vicinity.

Economic growth may have taperedin some parts of the Middle Eastbut growth rates are still attractivefrom a global perspective, investorssay. Growth in the six-member GulfCo-operation Council is forecast toslow to 3.7 per cent in 2013 from5.6 per cent this year, according to

the International Monetary Fund.Growth in the region’s oil import-

ers, including Afghanistan and Paki-stan, is set to increase to 3.3 per centnext year from 2.1 per cent in 2012,according to the fund.

The model of investing in the Mid-dle East to take advantage of thatgrowth is still valid and differs fromthe western private equity industrythat has been dominated by taking ondebt to exploit short-term opportuni-ties, investors say.

There has been a number of sizeableprivate equity deals in the MiddleEast over the past year.

Citadel sealed its $3.7bn petroleumrefinery project in June, alongsideQatar Petroleum International andEuropean and Asian developmentbanks. Qatar plans to invest with Cit-adel again, agreeing last month towork on a liquefied natural gasproject that would help Egypt meet itsenergy needs.

Bahrain-based Investcorp, with$11bn under management, has alsobeen active this year, announcing itsfirst exit from its Gulf opportunityfund in February. The sale of Reding-ton International Holdings, a distribu-tor of IT and telecoms products in theMiddle East, Africa and Turkey, gen-erated a net internal rate of return of17 per cent.

In September, it said it would take a35 per cent stake in Kuwait’s Auto-mak, the independent vehicle leasingcompany, through capital injection.

But while some business has beencontinuing as usual, other Gulf invest-ment companies have struggled aftertaking on excessive levels of debt fortheir deals.

Bahrain’s Arcapita has soughtbankruptcy protection in the US,while Kuwait’s Global InvestmentHouse and The Investment Dar havehad to restructure their debt.

“I’m seeing a bit of a natural selec-tion, whereby those that have sur-vived will have a better chance in therecovery,” says Mr Souaid. “Manycame with less experience and moreambition than prospects and now theyhave been set aside.”

For those that have survived, itlooks like the private equity groups ofthe Middle East will be holding off onselling some of their biggest assetsuntil they see scope for better returns.

New reality enforces need to work harderPrivate equity Companies are having to take a longer-termperspective in order to generate returns, writesCamillaHall

Energy needs: Qatar Petroleum is an important investor in Citadel Capital’s $3.7bn refinery project deal signed with Egypt in June Getty

Moody’s has lowered ratings

FINANCIAL TIMES THURSDAY DECEMBER 13 2012 ★ 3

Arab World Banking & Finance

Lebanese banks’ once soar-ing profit growth hasplunged as the sluggishdomestic economy and spill-over from the crisis in Syrianext door take their toll.

In the first six months of2010, the year-on-year profitgrowth for Lebanon’s top 12banks was 27 per cent. Inthe same period of 2011, itwas 7 per cent and this yearit was 8 per cent.

In the sector as a whole,profit growth was just 2 percent in the first ninemonths of 2012. What somehad hoped was a temporaryshock is emerging as atrend.

Different analysts in thesector, whose combineddeposits total nearly $150bn,emphasise different causes.For Fadi Osseiran, generalmanager at BlominvestBank, it is turmoil-rackedregional markets that havebeen eating away at profits.

Riad Salameh, the centralbank governor, told Reuterslast month that Lebanesebanks’ exposure to Syriaalone had cost them $400m.The banks’ business in Leb-anon itself is “healthy”, MrOseiran insists, in spite ofthe slowdown. “What wehave seen is not a slow-down in every area,” hesays. “We are not upbeat –there is no buzz of course –but activity is still goingon.”

By contrast, Nassib Gho-bril, chief economist at Byb-los, argues that it is theLebanese economy that ismost affecting prospects.“We are Lebanese banks –we are not internationaland we are not regional.Most of our revenues are inLebanon,” he says. “What-ever happens in Lebanonhas the most impact on rev-enues and profitability.”

Credit rating agencyMoody’s estimates that realgrowth in gross domesticproduct will be about 2 percent in 2012 and 2.5 per centin 2013, contrasting thesefigures with an averageannual growth rate of 8.1per cent between 2007 and2010.

This pattern is of courseimpossible to dissociatefrom the turmoil in Syria,which has contributed to anincreasingly unstable envi-ronment in Lebanon itself.

But neither has the situa-tion been helped by thepolitically paralysed gov-ernment which has failed toeither stimulate growth oraddress the worrying gov-ernment deficit.

“Local businesses are in

wait and see mode. Therehasn’t been a major FDIproject since early 2011 – allthis accumulates to reducedomestic lending opportuni-ties,” says Mr Ghobril.

It would take a shock onthe same level of magnitudeas the Doha accord (bro-kered when opposing fac-tions nearly brought thecountry to civil war in 2008)to reverse these trends, MrGhobril argues.

In another part of theworld, such an outlookwould be depressing. InLebanon, however, a smallcountry of few naturalresources perched on theregion’s most volatile politi-cal faultlines, bankers aremore inclined to emphasisehow much worse it couldbe.

Years of insistence onhigh liquidity buffers andcautious lending, much of itto the government, haveserved the sector well fortimes such as these.

Nonetheless, the latestassessment by Moody’s inOctober continues to rankthe outlook for the sector asnegative. Incorporatingboth explanations for the

sluggish profit growth, theagency predicts 18 monthsof weakened profitabilitydue to higher provisioningneeds in countries such asSyria, lower business vol-ume and reduced fee gener-ation.

Nadim Kabbara, head ofresearch at FFA privatebank, says that, while pres-sure on their margins is aconcern, the banks willprobably withstand difficulttimes. He emphasises, how-ever, that they need to findsources of new growth andprofitability in the longterm. “The banks have hada strategy of diversifyingtheir income …. [it] has notplayed the way they wouldhave liked,” he says.

“I think now it’s up tothem to decide how theycan make up for the short-fall in profitability andwhere they can findgrowth.”

One option that has beentalked about is pushing intomore unusual foreign mar-kets, such as Iraq andLibya.

Historically, Lebanesebanks have not been boldenough in these ventures,Mr Tabbara says. A deci-sion by Banque Audi lastyear to establish a subsidi-ary in Turkey with $300m ofshare capital could providea more interesting model,however. Marwan Barakat,head of research at BanqueAudi, says the project hasseen “very significant”growth in the first fewmonths of operations.

“Audi is taking thatwager,” says Mr Kabbara.“The opportunity is clearlythere, but it’s very competi-tive.”

Temporary shock on volatilefaultlines has turned into trendLebanon

Bankers say thingscould be muchworse, writes AbigailFielding-Smith

Hamra Street: business in Lebanon itself is ‘healthy’ Reuters

As financial markets in northAfrica have been shaken bythe region’s political insta-bility, banking has proved arare bright spot in its ability

to attract the attention of foreigninvestors.

Commercial banks in Tunisia,Egypt and Libya are looking ripe foracquisition as European lenders try tooffload overseas assets at attractivevaluations. “You will see more oppor-tunistic transactions where a bankthat is underperforming is looked at[as a target for acquisition or take-over],” says Ahmed Ozalp, managingdirector at Akanar Partners, a Cairo-based mergers and acquisitions advi-sory.

“That’s what is happening with theFrench banks. The motivation to sellis not so much Egypt-risk per se, butmore pressing liquidity concerns ontheir home turf.”

In Egypt, which is seen as an impor-tant market for lenders who want togain a strong foothold in the region,liquidity pressures because of theeurozone crisis have forced a handfulof European banks to sell assets.

Société Générale is nearing the saleof its majority stake in NSGB, itsEgyptian subsidiary, to QatarNational Bank in a deal worth about$2.6bn. BNP Paribas seeks bids for thesale of its Egyptian retail arm, whichis expected to generate between $400mand $500m. Last year, Standard Char-tered came close to acquiring theEgyptian assets of Greece’s PiraeusBank.

In the wake of the revolution lastyear, the Egyptian government’sincreased reliance on its domesticbanks to fund the budget deficitthrough the sale of treasury bondsand bills has taken the shine out ofthe sector somewhat.

Ahmed Housseiny, chief executive

at Planet IB, the investment bank,says the practice of selling treasuriesto domestic banks “cannibalises”credit that could have been directedto the private sector.

Nonetheless, bankers say Egypt’smarket is likely to see more M&Aactivity, given its large unbanked pop-ulation. Only 10 per cent of Egyptianshave a bank account.

In Tunisia, where more than 20banks vie for customers, consolidationis seen as inevitable. “The size of eachbank is very small, meaning there isreally no champion in the market andit becomes a problem for innovation,”says Laurent Gonnet, senior financialspecialist in Tunisia for the WorldBank. “But if you want to modernisethis sector, consolidation is just thestart.”

Resolving the high percentage ofnon-performing loans is a much moreurgent problem, he says. NPLsaccounted for 13 per cent of loans atthe end of 2010, according to the latestfigures from the International Mone-tary Fund. Although a markedimprovement from the peak of 24.2per cent in 2003, this is still very highby international standards.

Mr Gonnet says the central bank isworking on the legal framework toform an asset management companythat would buy up and restructurenon-performing assets. Half are linkedto the tourism industry, one of thebiggest foreign currency earners for

Tunisia and which has been badly hitby the country’s uprising.

The most dramatic transformationhas been in Libya, where a totalreconstruction of infrastructure isunderway. With it has come a reas-sessment of legislation from theformer Gaddafi regime, much of itcharacterised by highly bureaucratic,regulated and mostly government-owned banks. Bankers say they areslowly being replaced, however, byinternational entrants.

This year, Qatar National Bankacquired a 49 per cent stake in Libya’sBank of Commerce and Development,one of the country’s largest privatebanks. Arqaam Capital, the Dubai-based emerging markets investmentbank, acquired Rashad Finance andManagement Advisory, a financialservices business in October.

“Whether we liked it or not, up tothe revolution most of our bankingwas government-owned with the mainproprietor and regulator of financialinstitutions being the central bank ofLibya,” says Alaa El Huni, an invest-

ment banker and former financialconsultant to the opposition NationalTransitional Council that toojk powerwhen Col Gaddafi fell.

“But we have already seen signs ofa relaxation in regulations with theallowance of QNB investing in Libya,”along with other banks, he adds. “It isnot as bureaucratic and stringent as itwas before.”

Oil-rich Libya is not short of capitalbut has a long way to go before it canestablish credibility among foreigninvestors. A relatively small popula-tion of about 6m, many of whom emi-grated to escape the violence lastyear, has meant “human capital ishugely missing”, says Mr El Huni.

The predominantly cash-based sys-tem has left Libya behind on techno-logical developments in banking.“People are walking around with hugewads of cash because there is no suchthing as online banking and ATMs arescarce,” he says. “I see this as anopportunity to take advantage of howbackward we have been and to usetechnology to bridge some gaps.”

Eurozone woesprovide assetsripe for pickingNorth AfricaEuropean banks are looking tooff load regional outlets, writesFarahHalime

Tunisia tourism: half of non-performing assets are linked to the industry AFP

The Arab uprisings had a relativelynegative impact on the banks’growth in countries that have beengripped by political turmoil. Projectswere put on hold, wary foreigninvestors shunned the region and thewealthy turned to overseas banks toshield their money from the newregimes.

In Saudi Arabia, by contrast,where the government swiftly movedto dampen revolutionary spirit witha plan to spend $130bn on publicprojects, banks have seen healthygrowth spurred by a surge indomestic credit, lower provisions andlarge public sector projects.

Net income of Saudi Arabia’s 12listed banks rose to SR27bn in thefirst nine months of 2012 comparedwith SR24bn in the same period lastyear. Saudi banks have the secondlargest asset base in the region afterthe UAE, with their combined assetsstanding at SR1.62tn. The industry’snon-performing loan ratios are thelowest in the region.

Key among them, is the SaudiFinancial Group, Samba, which wasthe third largest earner in the firstnine months this year as profitclimbed to SR3.46bn from SR2.37bnin the same period last year.

Samba increased its share of thebrokerage business by up to 10 percent in the year to August, accordingto a report by Kuwait’s NBK Capital.

“It rides on the positive macroeconomic story of Saudi Arabia.They are quite good at creating andputting out new products,’’ saysJarmo Kotilaine, a Bahrain-basedeconomist. Analysts say Samba, thesecond-largest lender by marketvalue, is well-positioned to benefitfrom the expected surge in SaudiArabia’s lending activities.

Credit growth in the kingdom rose11 per cent in August compared withthe same month last year, accordingto the Saudi central bank. It is still,however, far less than the boomyears of 2007 and 2008 when creditgrowth soared to 21.2 and 27.2 percent respectively.

The bank’s main exposure is toSaudi government and blue-chipcorporate borrowers. Samba’s loan-to-deposit ratio is 62 per cent, makingit the most liquid lender in the Gulf.Some experts say, however, that ithas been exposed to bad loansinvolving a big constructioncompany in the kingdom.

The group’s non-performing loansdropped to SR2.76bn in 2011 fromSR3.4bn the previous year.

Analysts say the bank still hasuntapped opportunities for growth inconsumer and real estate loans,although these are areas theconservative administration isreluctant to step into.

“The group’s profit is always inthe billion riyals range but we haveto take into consideration that thereis no real competition in thekingdom. Big family names go to thesame banks for their projectfinance,’’ says one Saudi-basedbanker.

Samba is 23 per cent owned theSaudi government’s PublicInvestment Fund. The Public PensionAgency and the GeneralOrganisation for Social Insurancehold 15 per cent and 11 per centstakes respectively.

NBK forecasts that Samba will end2012 with operating income growthof 5 per cent and net profit growthof 2 per cent. These are likely to riseto 10 per cent and 12 per centrespectively next year.

Samba is the second largestpublicly traded company by marketvalue of $13.6bn. It has a network of69 branches and 496 ATM’s acrossthe region. It has 28 branches inPakistan and holds importantpositions in big financial marketsincluding London and Dubai.

Large publicprojectssignal wayto profit

ProfileSaudi Financial Group

Abeer Allam considers thefortunes of Saudi Arabia’ssecond biggest group

Samba bank: the most liquid lender

Egypt’s market is likelyto see more mergers andacquisitions activity,given its large unbankedpopulation

Michael PeelMiddle East Correspondent

Camilla HallGulf Correspondent

Simeon KerrGulf Business Correspondent

Abeer AllamGulf Editor

Abigail Fielding-SmithBeirut Correspondent

Farah HalimeFT Contributor

Stephanie GrayCommissioning Editor

Steven BirdDesigner

John WellingsPicture Editor

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4 ★ FINANCIAL TIMES THURSDAY DECEMBER 13 2012

Arab World Banking & Finance

The Industrial andCommercial Bank of ChinaMiddle East, the regionalunit of the world’s largestbank by marketcapitalisation, was the firstChinese bank to set up shopin Dubai’s financial centre.Now, the lender has its

sights on a broader MiddleEastern footprint, underliningthe deepening financial linksthat are accompanying therising volumes of trade andinvestment between the Gulfand China.“We are committed to

increasing significantly oursupport for, and involvementwith, the long-termeconomic development ofthe Middle East,” says TianZhiping, chief executive ofICBC Middle East.The lender was the first

into the region, setting upits regional headquarters inthe Dubai InternationalFinancial Centre (DIFC) in2008, where it has 47 staff.This subsidiary office is

complemented by branchesin Abu Dhabi and Qatarwith eight and 10 staff,respectively.“We provide significant

funding for infrastructureand development projectsand, increasingly, we arefacilitating the rapid growthof trade and investmentbetween the Middle Eastand China,” he says.The bank’s trade finance

volumes more than doubledfrom $1.5bn in the first halfof 2011 to $4.4bn in the firsthalf of 2012.The lender’s operations

are, for now, focused oncommercial banking, but itis looking to developinvestment banking andasset management.The ICBC has also been

granted banking licences inoil-rich Kuwait and SaudiArabia, the Arab world’slargest economy and mainoil exporter to Asia.“We look to target regions

that have a significantnumber of Chinesebusinesses in operationalready, which allows us toplay the critical role offinancial intermediary,” says

Mr Tian. “We plan to focuson these markets, as well asour expansion in the UnitedArab Emirates and Qatar, forthe time being.”As well as supporting

Chinese companiesexpanding into the Gulf,especially those inconstruction,telecommunications andaviation, ICBC hopes towork with regionalcompanies seeking to enterthe Chinese market.“We believe that, as trade

increases between China andthe Middle East, there is asignificant demand for awell-known Chinese bank inthe region,” says Mr Tian.The ICBC is also

expanding into LatinAmerica, eastern Europe andAfrica, the latter via its 20per cent stake in StandardBank.Subject to regulatory

approval, ICBC also hopes tolaunch retail bankingservices in the UAE.Diplomats estimate that

there are between 200,000and 300,000 Chineseresident in the expatriate-dominated UAE.The ICBC has boosted its

relationships with localfinancial institutions andexchange houses to easeremittances into China,which have risen six-fold invalue and one-and-a-halftimes in volume in the firsthalf of 2012, comparedwith the same period lastyear.The use of renminbi in

transactions is also growing,up 58 per cent in theinterbank money market inthe first half of 2012, whileforeign exchangetransactions against theChinese currency are upalmost 19 times in thesame period.The size of the market is

already attractingcompetitors. The AgriculturalBank of China received alicence to operate in theDIFC last month. Others areexpected to follow in duecourse, say bankers.

Simeon Kerr

ICBC Chinese lender seeks a broaderfootprint in support of expanding trade

The New Silk Road connectingmodern Asian and MiddleEastern trade and invest-ment flows has been welltrodden for years now.

The symbiotic relationship betweenthe oil-producers of the Gulf and thefast-growing economies of Asia, led byChina, is starting to turn over thewestern-dominated business land-scape of the Middle East.

As trade volumes rise and Asiancorporations increasingly move to theMiddle East, banks are following.

If talks to sign a Gulf-China free-trade pact are successful, the pacecould pick up even more next year.

But Asian banks are playing catchup as most US and European institu-tions have been established in theGulf for years, if not decades.

In the Dubai International FinancialCentre, only 11 per cent of the finan-cial hub’s tenants are Asian.

“Asia is very high on our prioritylist of growth countries,” says JeffSinger, chief executive of the DubaiInternational Financial CentreAuthority.

“We are seeing heightened interestin trade between China and Africa –and Dubai is the natural location formany of these organisations to estab-lish their regional hubs, includinglogistics, trade as well as finance sec-tors.”

China’s largest bank by assets, theIndustrial and Commercial Bank ofChina, opened at the DIFC in 2008.

The country’s second largest bank,Agricultural Bank of China, incorpo-rated with the DIFC last month.

The slow start is partly because theDIFC’s regulator signed data sharingpacts with European and US counter-parts before it signed similar agree-ments with Chinese and Singaporeanregulators in 2008.

Chinese banks are testing the waterin these new markets.

“Chinese banks are adopting asoftly, softly approach. These are Her-culean sized banks in China and theydon’t go overseas with a cavalierapproach,” says Tim Evans, Dubai-based head of Global Trade Receiva-bles Finance for HSBC in the MiddleEast and north Africa (Mena).

“They are deliberate and methodi-cal, coming here to learn, like thecompanies before them – they start

small, find their key counterparties,and gradually build up from there,”he says.

Contractors have been the highestprofile representatives of corporateChina, with trade and logistics compa-nies also making headway.

“Large Chinese customers operatingoverseas, for now, are still developingtheir knowledge of this environmentand they need a bank to help themnavigate the region,” says Mr Evansof HSBC, which hires Mandarin

speakers to set up China desks in itsDubai offices to help meet these clientneeds.

Dealing with legal and regulatoryissues in a new jurisdiction remains abig headache for these new investors.Almost two-thirds express concernabout such problems, according to asurvey of Chinese investors publishedby law firm Latham & Watkins.

Over the next two years, 80 per centof surveyed investors see tradegrowth and 65 per cent expect signifi-

cant investment growth in Chineseactivity into the Middle East andnorth Africa.

The survey revealed that 85 per centbelieve that mergers and acquisitionswill be the main form of Chineseinvestment. A similar percentagebelieved that Dubai would emerge asthe hub for these flows.

Trade between the United ArabEmirates and China flourishes, withsome of the more optimistic forecastssuggesting it could more than trebleto reach about $100bn by 2015.

While European banks and touristshave withdrawn from the region amiddebt woes at home, Asian companiesand visitors are on the up.

Jebel Ali Free Zone, the large logis-tics park on the outskirts of Dubaiand that contributes about a fifth ofthe emirate’s economic output, hasseen the number of Chinese compa-nies double to 130 over the past fiveyears.

The logistics zone next to theDubai’s main port will this year chan-nel a third of the UAE’s bilateraltrade with China.

Dubai may be approaching arenewed building boom but, since thereal estate crash of 2008, the fewbuilding sites in operation have oftenbeen handled by Chinese contractors.

The top energy projects remain thedomain of western contractors, whilemid-level developments such as air-ports are becoming the domain ofTurkish interests.

Civil works across the region, how-ever, are increasingly carried out byChinese contractors.

The UAE’s decision in 2009 to awardthe $20bn contract to build nuclearpower plants to South Korea hasproved a decisive factor in fosteringrelations with Seoul and, thereby,another strong Asian economy. SouthKorean industrial conglomerateDoosan Heavy has said that half itspower unit’s revenues are generatedby projects in the Middle East.

“We are aggressively promoting andsupporting the Asian-Mena trade cor-ridor – you just have to look at thegrowth in south-south trade,” says MrEvans. “It’s China into India, Indiainto the Middle East and onwards toAfrica and Latin America”, he adds.“The UAE and Dubai are very wellplaced to capture those flows.”

Oil link recasts business landscapeAsian inroads Symbiotic relationship is starting to transform the status quo, says SimeonKerr

Chinese premierWen Jiabao ona visit to Sharjah