The Report ranks the top banks in the GCC on the basis of several financial performance indicators (2002) that include Capital size, Return on Equity (ROE), Net Profits, Return on Assets (ROA), Leverage, Revenue Diversification & Growth, Expense Ratio and Economic Value Creation. The Report analyses the reasons for changes in performance as well as benchmarking the GCC banks against the performance of international banks.
Following are highlights of the GBC Top 25 GCC Banks Report:
The Top 25 GCC banks have posted healthy financial performance in 2002. The banking sector in particular benefited from low interest rates environment that enhanced their customers affordability to borrow and reduced the extent of provisions as the debt-servicing ability of existing customers improved. It also enjoyed an above-average spread as interest rates on loans declined at a slower rate than interest rates on deposits in the backdrop of this supportive business environment.
Saudi banks took top four positions on Capital Size. Saudi American Bank (SAMBA) maintained its No. 1 position with $2.64 billion followed by Riyad Bank at $2.42 billion. National Commercial Bank (NCB), making its financials public after many years, secured 3rd place ($2.38 billion). (Enclosure 1: Top 25 Banks in the GCC by Capital)
Banks are accountable first and foremost for the capital they are given to manage by their shareholders. ROE rankings were given prominence as a performance indicator and saw NCB, the new entrant on the Top 25 list, deliver an impressive 32% ROE in 2002 beating competition by a mile. Saudi Hollandi Bank (23.1%) took 2nd place with Kuwait Finance House coming in at No. 3 with 21.8%. SAMBA dropped six places from 1st to 7th. Again, Saudi banks dominated the ROE rankings due to large amounts of non-interest bearing deposits where blended interest costs were much lower than for non-Saudi banks. (Enclosure 2: Top 25 Banks by ROE) & (Enclosure 3: Top10 International Banks ˇV 2002 Financial Performance)
Financial performance not based on size: this was demonstrated by NCB and Riyad Bank (both with almost identical capital size) delivering very different financial returns. NCB topped the performance league, while Riyad Bank achieved a fairly average 15th ranking.
The message that emerges is that banks have to run to standstill. To maintain their current rankings banks have had to show 5% to 15% annual increase in profits.
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Banks have to run to standstill
- Bahrain: Saturday, September 20 - 2003 at 12:34
- PRESS RELEASE
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Gulf Banking Consultants (GBC) is soon to publish its second edition of Top 25 GCC Banks: Financial Performance and Future Challenges.
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The first of two main questions addressed by the GBC Top 25 GCC Banks Report is: Why some banks achieved better ROE than others? Methods of enhancing ROE include discussion on:
(Enclosure 4: Key Drivers of Return on Equity)
Risk and Capital Management: the analysis shows that capital leverage among the Top 25 GCC banks vary considerably but is generally well below those of global banks. On average, the balance sheets of GCC banks are leveraged around 9 times their shareholders funds. In comparison, the average capital leverage of international banks such as Citigroup and HSBC for example is much higher and close to 13.0. Notwithstanding the overall lower level of capital leverage, some GCC banks do a better job in capital and risk management than others. NCB is a good example of a bank that enhances its shareholder value by optimal utilisation of capital through leverage. Its 2.38% ROA is very similar to Saudi American Bank (2.42%) and Al Bank Al Saudi Al Fransi (2.39%). However, NCBˇ¦s 32% ROE is substantially higher than its two Saudi counterparts because of a much higher capital leverage achieved by its large market share and higher asset base.
Revenue Diversification: where GCC banks are encouraged to reduce their dependence on Net Interest Income (NII). Burgan Bank figures indicate 56% alternative revenue sources while Al-Rajhi Bank and Qatar National Bank show the lowest Non-NII income of 15%. The GCC banks average income diversification stands at 24%, less than half when compared to the Top 10 international banks index of 53%.
Revenue Growth: An important driver of performance improvement is a bankˇ¦s ability to achieve growth in revenue. While banks can gain one-time bottom-line improvement by cost reduction, the path to greatness is not through downsizing! With 28% growth in revenue, Bank Muscat (BM) tops the list although a part of this growth was achieved as a result of an asset acquisition. On the other end of the spectrum, Commercial Bank of Kuwait (CBK), Abu Dhabi Commercial Bank (ADCB) were at the bottom of the rankings with declines in revenue of 6%, 5% respectively. It was interesting to find market leaders like SAMBA, National Bank of Kuwait and Al Rajhi Bank at very nearly the bottom of the list in terms of revenue growth. This is particularly intriguing given GBC's remarks in its last year's Top 25 GCC Banks Report where they identified these three banks as examples of banking stars and commented on the challenges facing these banks in terms of revenue growth.
Expense Management: While it is difficult to make cost reduction the central plank of a value enhancement strategy in the GCC for a variety of practical reasons, it is nevertheless important to make sure that banks are managing their expense base in a prudent manner. The GBC analysis suggests that the 43% average expense ratio of the Top 25 GCC banks is significantly better than their international counterparts; e.g. the expense ratio of Citibank, Bank of America, Barclays and HSBC is 65%, 60%, 67% and 60% respectively in 2002. However, most analysts believe that the low expense ratio of the Top 25 banks is primarily due to the lower cost of human resource in this part of the world. Notwithstanding the above caveat, some GCC banks have an amazingly low expense ratio in comparison with international banks such as Gulf Bank and Abu Dhabi Commercial Bank leading with 26% expense ratios. At the other end of the spectrum, Arab Banking Corporation (ABC) showed an expense ratio of 97%. When reviewing financial data of banks with high expense ratio, it is difficult to say whether these banks are managing their costs relatively inefficiently or whether they have just not utilised their cost infrastructure effectively to increase their market share and revenue. The implications of the two are strikingly different for the relevant banks. If the former is true, then these high expense ratio banks should concentrate on cost reduction. However, if the latter is true, they should focus on marketing and revenue enhancement initiatives.
The second important question addressed by the GBC Report is: Which GCC banks enhanced shareholder value?
(Enclosure 5: Banks Ranked by Economic Value Created During 2002)
Rankings based on ROE show performance of banks relative to each other. While it is important to evaluate performance relative to the peer group, it is equally, if not more important, to ascertain whether banks are able to create economic value for their shareholders. Capital Asset Pricing Model (CAPM) was used to arrive at the cost of capital for various GCC banks which was then deducted from the ROE to identify banks that created economic value for their shareholders during 2002, as well as the banks that didn't. The GBC analysis indicates that about 20% of the banks in their Top 25 list depleted, rather than enhanced, economic value during the year. About 40% created marginal economic value for their shareholders. The remaining 40% of the banks created fairly adequate economic value for their shareholders. In fact, the financial performance of some of the GCC banks could make international banks become envious.
Enclosures:
1. Top 25 Banks in the GCC by Capital
2. Top 25 Banks by ROE
3. Top10 International Banks V 2002 Financial Performance
4. Key Drivers of Return on Equity
5. Banks Ranked by Economic Value Created During 2002
Notes:
We would ideally like the press release to be timed between September 20th and 25th 2003 to coincide with the IMF/ World Bank meetings being conducted in the UAE.
The full report would be published by early October 2003 and would be available free of charge.
Gulf Banking Consultants (GBC) is a UK incorporated management consulting firm with its headquarters in Bahrain. GBC is focused on providing consultancy services to financial services sector in the Middle East and the Emerging Markets. GBC is a network of senior banking professionals and experienced management consultants physically based in the UK, USA, Gulf region and Far East. As a team, the Associates of the firm bring over 300 years of combined experience in banking and other financial services sectors.
For any further information or clarification, please contact Mr. Khalid Rehman, Director, at +973 - 541 081.
(Enclosure 4: Key Drivers of Return on Equity)
Risk and Capital Management: the analysis shows that capital leverage among the Top 25 GCC banks vary considerably but is generally well below those of global banks. On average, the balance sheets of GCC banks are leveraged around 9 times their shareholders funds. In comparison, the average capital leverage of international banks such as Citigroup and HSBC for example is much higher and close to 13.0. Notwithstanding the overall lower level of capital leverage, some GCC banks do a better job in capital and risk management than others. NCB is a good example of a bank that enhances its shareholder value by optimal utilisation of capital through leverage. Its 2.38% ROA is very similar to Saudi American Bank (2.42%) and Al Bank Al Saudi Al Fransi (2.39%). However, NCBˇ¦s 32% ROE is substantially higher than its two Saudi counterparts because of a much higher capital leverage achieved by its large market share and higher asset base.
Revenue Diversification: where GCC banks are encouraged to reduce their dependence on Net Interest Income (NII). Burgan Bank figures indicate 56% alternative revenue sources while Al-Rajhi Bank and Qatar National Bank show the lowest Non-NII income of 15%. The GCC banks average income diversification stands at 24%, less than half when compared to the Top 10 international banks index of 53%.
Revenue Growth: An important driver of performance improvement is a bankˇ¦s ability to achieve growth in revenue. While banks can gain one-time bottom-line improvement by cost reduction, the path to greatness is not through downsizing! With 28% growth in revenue, Bank Muscat (BM) tops the list although a part of this growth was achieved as a result of an asset acquisition. On the other end of the spectrum, Commercial Bank of Kuwait (CBK), Abu Dhabi Commercial Bank (ADCB) were at the bottom of the rankings with declines in revenue of 6%, 5% respectively. It was interesting to find market leaders like SAMBA, National Bank of Kuwait and Al Rajhi Bank at very nearly the bottom of the list in terms of revenue growth. This is particularly intriguing given GBC's remarks in its last year's Top 25 GCC Banks Report where they identified these three banks as examples of banking stars and commented on the challenges facing these banks in terms of revenue growth.
Expense Management: While it is difficult to make cost reduction the central plank of a value enhancement strategy in the GCC for a variety of practical reasons, it is nevertheless important to make sure that banks are managing their expense base in a prudent manner. The GBC analysis suggests that the 43% average expense ratio of the Top 25 GCC banks is significantly better than their international counterparts; e.g. the expense ratio of Citibank, Bank of America, Barclays and HSBC is 65%, 60%, 67% and 60% respectively in 2002. However, most analysts believe that the low expense ratio of the Top 25 banks is primarily due to the lower cost of human resource in this part of the world. Notwithstanding the above caveat, some GCC banks have an amazingly low expense ratio in comparison with international banks such as Gulf Bank and Abu Dhabi Commercial Bank leading with 26% expense ratios. At the other end of the spectrum, Arab Banking Corporation (ABC) showed an expense ratio of 97%. When reviewing financial data of banks with high expense ratio, it is difficult to say whether these banks are managing their costs relatively inefficiently or whether they have just not utilised their cost infrastructure effectively to increase their market share and revenue. The implications of the two are strikingly different for the relevant banks. If the former is true, then these high expense ratio banks should concentrate on cost reduction. However, if the latter is true, they should focus on marketing and revenue enhancement initiatives.
The second important question addressed by the GBC Report is: Which GCC banks enhanced shareholder value?
(Enclosure 5: Banks Ranked by Economic Value Created During 2002)
Rankings based on ROE show performance of banks relative to each other. While it is important to evaluate performance relative to the peer group, it is equally, if not more important, to ascertain whether banks are able to create economic value for their shareholders. Capital Asset Pricing Model (CAPM) was used to arrive at the cost of capital for various GCC banks which was then deducted from the ROE to identify banks that created economic value for their shareholders during 2002, as well as the banks that didn't. The GBC analysis indicates that about 20% of the banks in their Top 25 list depleted, rather than enhanced, economic value during the year. About 40% created marginal economic value for their shareholders. The remaining 40% of the banks created fairly adequate economic value for their shareholders. In fact, the financial performance of some of the GCC banks could make international banks become envious.
Enclosures:
1. Top 25 Banks in the GCC by Capital
2. Top 25 Banks by ROE
3. Top10 International Banks V 2002 Financial Performance
4. Key Drivers of Return on Equity
5. Banks Ranked by Economic Value Created During 2002
Notes:
We would ideally like the press release to be timed between September 20th and 25th 2003 to coincide with the IMF/ World Bank meetings being conducted in the UAE.
The full report would be published by early October 2003 and would be available free of charge.
Gulf Banking Consultants (GBC) is a UK incorporated management consulting firm with its headquarters in Bahrain. GBC is focused on providing consultancy services to financial services sector in the Middle East and the Emerging Markets. GBC is a network of senior banking professionals and experienced management consultants physically based in the UK, USA, Gulf region and Far East. As a team, the Associates of the firm bring over 300 years of combined experience in banking and other financial services sectors.
For any further information or clarification, please contact Mr. Khalid Rehman, Director, at +973 - 541 081.
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