Banking Trends In MENA Amid Security Concerns

The Middle East, home to some of the fastest growing economies in the world, is seeing a booming banking sector attracting some of the world’s heavyweights in the industry over the past years since the recovery from the oil crisis of 2014. Regional lenders, especially in GCC, are increasing their international foray, reduce a glut of banks through a wave of synergies, adopting fintech and increasing presence in emerging markets like Saudi Arabia. However, banks operating in MENA are not independent to regional security concerns like political and diplomacy fallouts which pose severe threats to the operating environment for both international and regional institutions.

Bank Mergers

Despite being referred to as one of the unstable region in the world, the business portfolios of lenders from the Middle East and GCC, in particular, are doing well. Recently the global rating agency, Moody’s, reported that the outlook of the UAE’s banking sector will remain stable, reflecting a gradually recovering economy and banks’ strong capital, resilient profitability as well as solid funding. In its report, the rating agency projected a GDP growth of 2.2 per cent in 2018 for the UAE and 2.9 per cent in 2019, following a slowdown to 0.8 per cent in 2017 and this economic recovery will, in turn, stimulate credit growth.

The UAE is witnessing a wave of consolidation among banks in the Gulf returning to Abu Dhabi. Last year, the merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) which resulted in the formation First Abu Dhabi Bank (FAB), the largest bank in the UAE and one of the largest after Qatar National Bank in MENA region, provided the significance of banking industry synergies in the UAE. Additionally, the recent three UAE banks, state-owned Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB), as well as Shari’ah compliant Al Hilal Bank’s confirmed merger, has a possibility of creating what is going to be the fifth largest bank in the Middle East.

The three lenders announced in early September that talks are underway to combine into one entity with $110 billion of assets, according to a bourse filing by Abu Dhabi Commercial Bank (ADCB). Earlier this month, Bloomberg reported that under plans being discussed ADCB will acquire UNB to form a conventional lender and the Islamic divisions of ADCB and UNB would merge and then take over privately-held Al Hilal Bank to form a new Islamic lender. In Saudi, the Saudi British Bank (SABB) and Alawwal confirmed that they have entered into a binding merger agreement last month having started discussions on a potential merger in April 2017.

Alawwal bank and SABB merger will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets. On completion of the merger, SABB will continue to exist and Alawwal bank will cease to exist as a legal entity and its shares will be cancelled and new shares in SABB will be issued to shareholders of Alawwal bank. The second quarter of 2018 has also seen several potential bank synergies in the region. In July, Kuwait Finance House (KFH) invited Bahrain’s Ahli United Bank to begin a due diligence process for a potential merger.

In a bourse filing, KFH said that the scope of the agreement includes valuation studies and work to assess the feasibility of establishing a new banking entity and it would disclose any matters related to the possible merger in a sequential and timely manner. In the same month, Bank Dhofar and National Bank of Oman (NBO) announced plans for a potential merger and according to EFH Hermes the merged bank, with a combined asset of $20 billion (AED 74 billion) will be the second-largest financial institution in Oman after Bank Muscat.

HE Abdullah bin Salim al Salmi, the President of CMA, said that Oman needs bigger and stronger institutions not only in financial sector but in all the corporate sectors, adding that too many small players in Oman’s corporate sector will not be able to compete regionally and internationally as they will need to sustain their growth. The structural characteristics of banks and financial institutions in the region as a whole, are a diverse mix of conventional and Islamic entities, as well as being both retail-focused and corporate aligned in their stance which from a potential future merger perspective will offer value-added consolidations. MUFG MENA Research forecasts better asset pricing discipline as banks merge with lower concentration risks in loan portfolios.

The Levant

In Lebanon, the postponement in the formation of the Government has transformed a longstanding doubt of economic recovery into disappointment because of the lack of seriousness being displayed by lawmakers in mapping a way forward. The Lebanese people went to the polls in May, five years after they were originally scheduled, this resulted in a Shia militant and political group Hezbollah making record gains. About four months later, politicians have been fighting over political positions in a long-drawn-out saga reflective of the country’s complex sectarian divides and deeply entrenched system of patronage.

The squabbling has prevented the creation of a national unity government that is representative enough of the major parties to ensure political support across the country. Despite a positive gain in the real estate industry earlier in 2018, Lebanon is tipping into a property slump—and perhaps a banking crisis that threatens its currency. Trouble in the banking sector, which draws investors from around the region, might be felt beyond Lebanon’s borders. The International Monetary Fund (IMF) said that at 152 per cent, Lebanon’s nominal debt to the gross domestic product (GDP) is the third-highest in the world, cautioning Lebanon of the needs for an immediate and substantial fiscal adjustment to make its public debt sustainable.

Despite revenue gains, the fiscal deficit more than doubled to $1.9 billion in the first Q1 2018 against an increase in cash revenues by 3.4 per cent to a record high of $3.8 billion during the period. According to the Institute of International Finance (IIF), Lebanon’s outlook for the remainder of 2018 looks dismal in light of the burgeoning deficit, highlighting the need for transformative fiscal reforms. Additionally, it not only the politicalsectarian divides that are rocking Lebanon’s banking industry. In July, the local newswire, National News Agency, confirmed a nearly successful cyberattack by an Iraqi network that spread false information about Lebanese banks in order to extort them, aiming their ownership of deeds of assets to the value of millions of dollars.

Though a joint Iraq- Lebanon intelligence network managed to thwart the attempt, the attempt raised questions about the threat detection and advancement in technology within Lebanon’s banking sector.

The Kingdom

Saudi Arabia’s banking industry has been doing well with a number of international banks trampling on each other for licences to operate in the Kingdom following the announcement of the Tadawul’s inclusion in the MSCI emerging markets and the FTSE 100 index, the Crown Prince’s ambitious Vision 2030 economic transformation a plan as well as the future investment initiative and the impending initial public offering of Saudi Aramco. However, the recent international outrage against the Kingdom following the murder of journalist Jamal Khashoggi in Saudi Arabia consulate in Istanbul is casting a grey cloud on what the future holds for the banking industry in the Kingdom.

Last month, chief executives from HSBC Holdings, Société Générale (SocGen) and Credit Suisse Group among other international banks boycotted the Future Investment Initiative (FII) dubbed ‘Davos in the Desert’-- even though their senior investment bankers attended. The conference, which was expected to be the stage for announcing new ventures and billion-dollar contracts was overshadowed by unfavourable headlines, putting hundreds of millions of deals at stake in fees up for grabs over coming years as the Kingdom reorganises the economy away from its dependence on oil. This has also raised numerous security questions amongst international lenders that have been seeking licences to operate in the largest economy in the Middle East.

In spite of these, a number of regional and international lenders are still in pursuit of Saudi riches, saying their business interest in Saudi Arabia will not be affected. The Standard Chartered Bank, one of the leading lenders in the region said that it is pressing on with its application for a banking licence in Saudi Arabia. The UAE’s FAB is set to launch commercial banking operations in Saudi Arabia by the end of this year and it will be joined with the Trade Bank of Iraq which is continuing its international foray across the Middle East since opening a representative office in Abu Dhabi last November.

 Iran

The US’s tougher Iran policy, which includes the US withdrawal from the international nuclear accord negotiated by President Barack Obama in May, and re-imposition of sanctions under the Trump administration has a dealt a blow to the banking industry in the Persian Gulf country. International banks and financial institutions withdrew their operations in fear of sanctions or hefty fines from the US if they continue to service the country. The unstable security environment in the region has also made it impossible for Iranian lenders to conduct business with the outside world.

In July, Iran lost the bid to repatriate $350 million which was being held by the European-Iranian Trade Bank, majority-owned by Iranian state-owned banks, and registered with Germany ’s central bank, from Germany. Under the re-imposed US sanctions, Iranian banks will be excluded from the main credit card networks, including VISA and MasteCcard, making it difficult for Iranians travelling outside the country. Recently the Belgium-based firm, SWIFT, disconnected some Iranian lenders from its financial messaging service, adding that it was regrettable that the firm was not being allowed to be neutral.

Although SWIFT made no mention at the time of US sanctions as the reason for the decision, it is said that the Trump administration told the firm that it is expected to comply with sanctions or else it could face them itself if it fails to do so. However, the UAE granted two Iranian lenders, Bank Melli and Bank Saderat, servicing the country to continue with business as usual as the Central Bank of the UAE does not see any material impact from the renewed US sanctions on Iran. The re-imposition of sanctions has affected the economic activities of many international corporate companies-- banks are not spared.