MENA banks safer as giants stagger

MENA banks safer as giants stagger

DUBAI — Banks in the Middle East and North Africa region offer safer havens to investors looking for less volatility and limited downside as major banking institutions across Europe and America face seemingly insurmountable challenges.

By Issac John

Published: Wed 14 Sep 2011, 10:42 PM

Last updated: Tue 7 Apr 2015, 5:48 AM

With the Bank of America, Citibank, Goldman Sachs coming under mounting pressure, and European banks looking “absolutely dicey” due to their overwhelming exposure to Greek and other sovereign EU debt, the MENA banking industry is among the safest in the world “with minimal debt to GDP and very healthy core Tier 1 capital ratios,” banking analysts said in a report.

“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,” said the report by Audi Capital, a subsidiary of Bank Audi.

“Despite the richer valuations, we think that the MENA banks’ solid fundamentals, especially in Saudi Arabia 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.”

The report comes amid a grim forecast about the US and European banks’ profitability. US banks’ Q3 profit estimates were cut by an average 45 per cent by Citigroup Inc on concern that the global equities rout and volatility in credit markets will pare earnings. While British banks face some of the world’s toughest regulations, which require them to insulate their retail lending activities and store up billions in extra capital at an annual cost of up to $11 billion, French banks brace for more setback amid a rapid decline in their stock prices.

The report notes that the regional financial services industry remains stronger in sharp contrast to the international global banking sector. “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,” the report said.

While MENA banks do not suffer from capitalisation issues, in comparison, European banks need $287 billion in new capitalisation, according to estimates by the International Monetary Fund.

The bullish outlook for Middle East banks is based on their strong fundamentals. “They have 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,” the report said.

The second factor in favour of regional banks is the absence of exposure to sovereign debt. The MENA region benefits from low-debt tog domestic product, with the key economies delivering continuous fiscal surpluses, driven by strength in natural resources, the report noted.

The Audi report cites the regional banks’ higher profitability measured by a superior return on assets and strong return on equity as another strong point.

Another factor favouring the regional financial institutions brighter outlook include improving asset quality with falling provisions, which 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 the UAE to MSCI is another attraction as the region’s banks are among the largest constituents of the stock exchanges in Abu Dhabi, Dubai and Qatar. Regional banks also do not have to tap the wholesale markets owing to stronger liquidity, in times of rising risk premiums. Other positive factors include access to cheap cost of funds due to the high proportion of demand deposits and immaterial exposure to international operations, limiting the risk of default contagion.

Analysts are 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.

Banks in the UAE, Saudi Arabia 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, eight European banks failed a recent stress test, especially the key criteria of holding five per cent Core Tier 1 capital.

MENA banks, which have some of the lowest loan-to-deposit ratio in the world, 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,” the report said.


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