Global banks have played a prominent role in the Middle East for decades, particularly in areas such as project finance where their vast capital and depth of experience grant them a competitive edge. Although regional players have grown considerably in capacity – especially in the retail segment – a closer look at the structured lending being directed towards various large-scale developments in the MENA region usually reveals that at least one international institution is involved.
The global financial crisis of 2007-08, however, has brought a paradigm shift in the relation between regional banks and the global giants. The process of regulatory reform that the crisis set in motion has played a significant role in this shift, as regulators across the world aim to establish a less leveraged, more transparent and lower risk banking environment. One of the practical consequences of this drive is the demand by most national authorities for banks to increase capital adequacy ratios (CARs).
Raising Capital
Financial institutions have a number of means at their disposal to boost the level of their capital compared to their assets. One way to raise CARs is to increase retained earnings by reducing the share of annual profit paid out in dividends or widen the spread between the interest rate charged on loans and the interest paid on funding. Another, if less popular, option is to issue new equity on the open market, through a rights issue to existing shareholders, or by placing shares with an outside investor. A third option for banks seeking stronger CARs is to shrink the asset side of the balance book by running down loan portfolios or selling assets outright. The adoption of this last policy by some international lenders has caused global giants to withdraw from Middle East markets.
Market Exits
Recent years have seen a number of significant departures from the MENA region, all of which have either a direct bearing on Jordan’s banking sector or are of interest to banks looking to expand abroad. In December 2012 BNP Paribas announced the sale of its entire 95.2% stake in BNP Paribas Egypt to Emirates NBD, whose subsequent purchase of the remaining stock made it the sole proprietor of what had been a French-owned enterprise in the world’s most populous Arab country. The deal has given Emirates NBD a network of 69 branches in what is considered one of the most under-banked markets in the region, and one that, should economic and political stability return to the country, is well placed to expand in the coming years.
Another high-profile departure came in September 2013, when Barclays decided to sell its UAE retail operation to Abu Dhabi Islamic Bank. This move brought around 110,000 new customers to the sharia-compliant financier, advancing its strategy to increase its consumer base both within the crowded UAE market and beyond its borders.
Strategy Shift
In late 2013, HSBC announced it would restructure its business model in the region. After reviewing its MENA operations, the bank decided to discontinue its wealth investment and wealth insurance practice in Jordan, Lebanon and Bahrain. In practice, this will mean ending the sale of products such as mutual funds, bonds and structured deposits, as well as discontinuing a range of insurance instruments. According to a statement released at the time, the size of the respective markets contributed to its decision, which is part of its global strategy for retail banking and wealth management, meant “to offer and grow the wealth business in markets where we can achieve scale”.
The changes to HSBC’s operations in the region run even deeper. The bank has also reduced its retail operations in those same three countries, as well as in other Middle East nations. In Oman, it has merged its operations with a local bank as part of its three-year global restructuring strategy.
In the case of Jordan, the bank’s exit is to be a comprehensive one, rather than a partial scaling-back. In early 2014 HSBC announced that it is to sell off its entire $1.2bn banking operation in the country, and that it had inked a deal with the Arab Jordan Investment Bank to take the business off its hands. The bank has also made it known that it expects most of its employees, the bulk of whom are based in one of HSBC’s four Jordanian branches, to transfer over to the new business when the closing conditions are completed later in 2014.
Regional Advantage
The trend is unmistakably clear. Foreign banks, under pressure to meet new regulations that were introduced to ensure they have enough cash in hand to deal with any potential losses, are reducing their overall risk exposure in the region. In place of this, they are focusing on more profitable locations and business segments. Among European banks, the arrival of the Basel III international banking standards, which are due to come into force in 2018, is driving this process further.
The result is that a space is opening up in the Middle East banking arena for ambitious regional players to fill. From the standpoint of capital adequacy, local banks that have thrived on the rapid development of the region’s economies in recent years are well placed to capitalise on this shift. “The Jordanian banking sector is robust, and with the new governance laws from the central bank coming into the picture, should strengthen even more,” Iyad Al Asali, CEO of Islamic International Arab Bank, told OBG. Assessing CARs for comparison between continents, however, is rendered somewhat problematic by the fact that national authorities use different definitions for both of the concepts that determine these numbers: capital and assets.
By the figures which such separate standards yield, at least, Jordan compares well with other regions. The US Federal Reserve reports that the ratio of total capital to total assets for commercial banks in the US stood at around 11.6% in 2012. The European Central Bank, meanwhile, has put the CAR ratio for the euro area at 9.1% for the same year. Gulf banks show capital ratios that are significantly higher than both of those, according to the New York-based Institute of International Finance: those in the UAE started 2012 with an aggregate CAR of 20.8%. In Bahrain this ratio stood at 19.5%, in Kuwait 18.5%, in Saudi Arabia 17.1%, in Qatar 16.1% and in Oman 15.5%. All of these countries are well in excess of the requirements laid down by their respective national authorities and regulators.
Aggregate CARs for the Jordanian banking sector have shown a similar robustness to its regional peers, according to data from the Central Bank of Jordan (CBJ). Since 2003 the country’s aggregate CAR has not fallen below 15.9%, and as of June 2013 it stood at 17.9%. Capital adequacy levels in Jordan, therefore, sit comfortably above the CBJ mandate of 12%, as well as above the 8% limit set by the Basel Committee for Banking Supervision. Asset expansion by Jordanian banks, whether it comes through increased domestic lending or through expansion into foreign markets, would not therefore present a serious challenge to their financial soundness.
Jordanian Expansion
Expanding into regional markets, however, can be challenging for banks on a number of other levels, from gaining regulatory approval to accounting for the risk of political turbulence. Jordan’s best known banking export has overcome many such hurdles in its long history. Arab Bank, one of the largest financial institutions in the Middle East, has been headquartered in Amman since the end of the British Mandate in Palestine in 1948, when it was compelled to leave Jerusalem. Since then, the publicly owned company has expanded throughout the region and established itself as a catalyst for Arab economies, surviving nationalisations, wars and economic upheaval to keep its prominent place within the Middle East’s financial sphere. Today, the Arab Bank Group operates the largest branch network in the world, with a presence in 30 countries spanning five continents.
More recently, Jordan’s Capital Bank has demonstrated a similar interest in regional expansion by acquiring a 72% controlling stake in the National Bank of Iraq. In its new management role for the Iraqi lender, it has engaged in a branch expansion across its eastern neighbour, including into the capital of the northern Kurdistan region, Erbil.
The unrest that Jordan’s troubled neighbour is now experiencing is only one example of the risks faced by foreign firms when they enter some of the region’s developing markets. Yet the rewards for such strategic boldness can be considerable. Profits at the National Bank of Iraq rose sixfold in 2012, Capital Bank’s executive chairman, Bassem Khalid Al Salem, told The New York Times in 2013. Jordan’s geographic location means that its financial sector is used to risk and regional turbulence, and its larger institutions are well placed to move into the Middle East’s more troublesome areas as well as into its lower-risk and more business-friendly markets.
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