Largely unaffected by the political and economic turbulence outside the country, Kuwait's banks recorded strong growth in 2012, and are looking to improve on this in 2013, by seeking further growth abroad and taking advantage of the opportunities offered by the government's $130bn national development plan.

Amid domestic political turmoil, and largely without the stimulus of the country's $130bn national development plan, the Kuwaiti banking sector still managed to record growth and strong performances in 2012. While the Arab world, particularly Syria and Egypt, was beset by wars and political tensions, Kuwaiti banks achieved growth and expansion in Turkey and across the Gulf, heralding the beginning of a new era, unencumbered by the domestic political stalemate of recent years.

Preliminary results for 2012 from the Central Bank of Kuwait (CBK) show that aggregate banking assets increased 7% to Kd52.7bn ($185bn), with customer deposits increasing by 16.5% and shareholder’s equity by 4.1%. According to the new CBK governor, Mohammad Al-Hashel, Kuwaiti banks continue to be well capitalised and highly liquid, with a capital adequacy ratio of 18% and liquid-assets-to-total-assets ratio of about 25% at the end of 2012.

Bank credit grew by 5% among Kuwaiti banks in 2012, with consumer credit and non-financial business activity performing strongly, making it the best year for credit performance since 2009. According to a National Bank of Kuwait (NBK) February 2013 report, banks continued to enjoy high levels of liquidity, supporting the declining trend in the cost of funds. Consumer credit activity increased by 16.6% in 2012 compared with 9.5% in 2011, while non-financial business activity was at 4.2% compared with 1.9% in 2011.

However, it was not simply a straightforward picture of growth. Along with the paucity of major projects for the banks to lend to, non-bank financials saw their credit facilities contract by Kd475m during 2012, reflecting the continued deleveraging by Kuwaiti investment companies, which were badly hit in the 2008 global financial crisis. Credit to these institutions contracted by Kd457m in 2011.

On the positive side, the non-performing loans (NPL) ratio for the Kuwaiti banking system has fallen to a healthier 4.95% at the end of 2012 from 7.06% in 2011. With the absence of lending opportunities in the wider economy, banks were squeezed in 2012, and were clearly looking for the political impasse to end, as it appears to have since the December 2012 elections. Lending now looks set to improve in 2013, as the market becomes more hopeful and the mega projects envisaged by the national development plan finally start to be executed.

Positive outlook

Despite referring to 2012 as a “difficult year”, and notwithstanding the ongoing challenges both inside and outside Kuwait, NBK – the country’s biggest bank by assets – nevertheless produced a strong set of results. The NBK Group reported net profits of $1085m for 2012, compared with $1075m for 2011. Total assets reached $58.4bn, a strong 20.4% increase on the 2011 figure of $48.5bn. Shareholders’ equity also saw a 6% increase to $8.2bn. 

NBK Group's chief executive, Ibrahim Dabdoub, is critical of the stagnant operating environment that characterised Kuwait in 2012. He says that the geopolitical tensions associated with the Arab Spring led to further pressures on business sentiment, both locally and in the region. But in January 2013, when NBK announced its 2012 results, Mr Dabdoub suggested that he expected the outlook for the local operating environment to improve in 2013, as the government adopts a more dynamic fiscal policy, most importantly, accelerating spending on mega projects.

“The recent directions from the highest authority and the proposed measures to boost economic activity and spur growth are expected to lift the overall sentiment and create new opportunities in the local economy,” he said.

NBK, which operates 64 branches in Kuwait and a further 173 branches across 17 other countries and accounts for more than one-third of Kuwait’s banking assets, significantly improved its Islamic banking capacity during 2012. By increasing its stake in Boubyan Bank in July 2012 to 58.4% from 47.29% and transforming it into a subsidiary, NBK has strengthened its presence in the local Islamic banking market and its potential in Islamic markets abroad. It can now compete locally with its main rival in the domestic Islamic market, Kuwait Finance House (KFH), and look to expand into Islamic banking markets abroad.

NBK’s international banking profits recorded a year-on-year growth of 22.7% in 2012, accounting for 23% of the bank’s revenues. While Kuwait still represents a major business hub for the bank, Mr Dabdoub hopes that the bank's international network will increase its international revenues well beyond the current 23%, especially if it is able to expand its franchise into Saudi Arabia and build on operations in Turkey and Iraq.

Islamic influence

Islamic banking has become increasingly competitive in Kuwait. When it opened its doors in 1977, KFH was the country’s first Islamic bank; today there are five Kuwaiti banks in the Islamic market. Besides KFH and Boubyan, Kuwait International Bank converted into an Islamic bank in 2007 and Al Ahli United Bank did the same in 2010. Warba Bank is the fifth Islamic institution.

Saudi Arabia’s fourth biggest bank, Al-Rajhi Bank, has established a single branch in Kuwait, bringing the total number of Islamic banks operating in the country to six, with KFH continuing to dominate the market. 

KFH, the second largest bank in the country, recorded an increase in both revenues and profits in its 2012 results. The Islamic bank posted net revenues of Kd932.8m for 2012, an increase of 7% over 2011. Net shareholders’ profits reached Kd87.7m, an increase of 9% compared with the Kd80.3m achieved in 2011. Mohammad Al-Khudairi, chairman of KFH, says that total assets rose to Kd14.7bn, an 8% increase on 2011, with deposits up 6% at Kd9.4bn. The bank’s capital adequacy ratio also increased to a very acceptable 14%.

“The growth in KFH’s financial results confirms the success of KFH’s transformation programme. We consider these results a significant milestone in this strategic programme that continues to place KFH on the right track to achieving sustainable profitability, enhancing its market position and confirming its leadership in the Islamic banking industry, the foundation of which has been laid through the bank’s proven track record of success and expansion over the past 34 years,” says Mr Al-Khudairi.

Mr Al-Khudairi also notes that after allocating Kd255.3m to provisions, the bank was able to reduce its NPL ratio to 5.7%, from 9.3% in 2011.

The bank has plans to increase its capital by 20%, such is its confidence in its local and global expansion plans. The bank already has 300 branches worldwide, including its growing subsidiary KFH Turkey, which opened 40 new branches last year to bring its total in Turkey to 245 branches.

With about 31% market share of total banking assets in Kuwait, KFH has a formidable franchise and has been helped in its transformation programme by a collaboration with consultants Booz & Co. Mohammad Sulaiman Al-Omar, the CEO of KFH, says that the bank’s new strategy is to concentrate on retail, not only at home but in the expanding markets of Turkey, Dubai and Bahrain. With these developments in the pipeline, Mr Al-Omar is very optimistic about 2013. 

Kuwait Stock Exchange three-month performance

Familiar ground

Gulf Bank is Kuwait's fourth largest bank in terms of assets and winner of The Banker’s Bank of the Year award in Kuwait in 2012. It has come a long way since its large derivative trading losses in 2008 of Kd375m, which required intervention from CBK.

In 2009, the bank brought in new senior management and a two-year turnaround plan was put in place, which has proved very successful. Focusing on retail and traditional commercial banking, in 2011, the new management introduced the ‘we promise’ campaign, which guaranteed customers better and faster banking services, such as same-day turnaround on loans and cards.

The new-improved service proved to be a hit in Kuwait and the bank's consumer loan origination volume has almost doubled as a result. “Cards increased by 70%, with customers getting their new cards on the same day,” says Michel Accad, chief executive of Gulf Bank. The bank also increased its branch network from 49 to 56.

While the bank is ambitious, it is sticking to what it knows best and Mr Accad is insistent that the bank should focus on its core competencies and not try to expand into investment banking or look for expansion outside Kuwait. The memories of its 2008 losses live long and the bank is careful in what it does. One change it did look into making was opening an Islamic window. However, the CBK rejected its application on the grounds that it does not allow Islamic windows. 

Gulf Bank finished 2012 with strong results in the fourth quarter and solid growth for the year. Income before provisions amounted to Kd121.4m, up 13% on 2011. Net profit for the year was flat at Kd30.9m against Kd30.6m in 2011.

"This year's results show the continuation of a strong and solid performance by Gulf Bank. In consumer banking we have raised the bar with our 'we promise' programme, guaranteeing the best and fastest banking services, which, along with our strong leadership and management team, has contributed to solid growth and increased market share," says Gulf Bank’s former chairman, Mahmoud Abdul Khaleq Al-Nouri. (Mr Al-Nouri resigned on March 13, 2012. At the time of The Banker going to press, Gulf Bank's board of directors were due to elect a new chairman during their next meeting on March 16, 2012.) "On the corporate banking front, Gulf was mandated as the lead manager to help finance two of the largest and most complex projects in Kuwait.”

Success abroad

Burgan Bank, the fourth largest bank in Kuwait by capital and assets, announced significantly improved results in 2012 with growth in all major indicators and continued expansion abroad. The banking group, comprising five majority-owned subsidiaries – Gulf Bank Algeria, Bank of Baghdad, Jordan Kuwait Bank, Tunis International Bank and recently acquired Burgan Bank Turkey – posted net profits of Kd55.6m, 10% up on 2011. Operating income grew 16% to reach Kd190m, while operating profits before provisions grew 17% reaching Kd119m.

The bank's international operations – in Algeria, Iraq, Jordan, Tunisia and Turkey – are in growth mode and the contribution of its five international operations (excluding Turkey, which was acquired on December 21, 2012) accounted for 48% of total group revenues.

“We are continuously increasing our market share in profitability. Loans and advances grew 50% to Kd3.4bn, while customer deposits grew 39% to Kd3.9bn. Our NPLs are decreasing and our provisions reached Kd194.4m with our NPL ratio [net of collateral] to gross loans stands at 1.9%, capital adequacy stands at 18.5%,” says Burgan’s chairman, Majed Essa Al Ajeel. Burgan chief executive, Eduardo Eguren, says that the bank’s return on equity increased to 12.4% in 2012, from 12% in 2011.

Seeking extra growth

The bank's 2012 revenues of Kd190m were led by its Kuwait-based operations, which accounted for 49%, and Algeria-based operations, which accounted for 18% at Kd34.7m. The bank's recent acquisition of Burgan Bank Turkey (formerly Eurobank Tekfen), in December 2012, is likely to further boost the revenue of the bank's international operations.

Mr Eguren says that the Turkish operation, which has a presence in 21 cities with 44% of its branches in Istanbul, fits Burgan’s regional strategy of providing a fully fledged and scalable platform that offers upside growth potential across the group.

The CBK has given its approval to Burgan to purchase a 25% stake in Malta-based FIM Bank, a trading bank with a strong and useful global trading network. Burgan hopes to take control of FIM in the third quarter of 2013.

With the bank's current international expansion in countries with strong growth prospects, Mr Eguren expects the bank's international subsidiaries to contribute up to 60% of Burgan’s revenues by 2014. Although he is keen to stress that this growth should not come at the expense of the bank's domestic market. He says that the country has lots of potential, especially with the EDP, but he believes that Kuwait can only expect slow growth. “There are plenty of projects but it takes time," he says.

Maturing markets

An important part of the financial development in Kuwait has been the growth of the capital markets and the increasing role of regulators, especially the Kuwait Capital Markets Authority (CMA). Ahead of the planned privatisation of the Kuwait Stock Exchange (KSE), the CMA has been stepping up efforts to ensure listed firms are fully in compliance with a tightened regulatory regime.

At the beginning of 2012, it was announced that the KSE would itself go public, with HSBC tasked with overseeing the transformation. As part of that process, the CMA and the exchange have been moving to improve the KSE’s brand, including refining trading regulations, and strictly enforcing reporting and transparency requirements.

NBK Capital, set up in 2005 as a subsidiary of NBK, focuses on four main business lines: alternative investments, asset management, brokerage and research and investment banking and, in recent months, has pulled off two major deals that demonstrated not only the bank's capabilities but also Kuwait’s growing investment role.

NBK Capital advised Qatar Telecommunications (Qtel) on the successful completion of their Kd519.1m acquisition of 39.6% of National Mobile Telecommunications, bringing Qtel’s holding to more than 92%.

“This is a landmark transaction that involved working with a number of parties, including regulators and investors. The decision by Qtel to appoint NBK Capital to advise on such a high-profile transaction demonstrates confidence in NBK Capital’s capability,” says Salah Al-Fulaij, chief executive of NBK Capital. “Since the CMA was established, Kuwait has seen a number of tender offers, which confirms the country’s status as an attractive destination for doing business and a well-regulated and transparent market.”

Outside interest

In another important deal emphasising the growth of Kuwait’s debt capital markets, NBK Capital and Kamco announced at the end of 2012, the successful completion of a Kd100m lower Tier II subordinated bond issue by Burgan Bank in which they acted as joint lead managers. The largest bond ever issued by a private sector issuer, it signals the continued development of the local debt capital markets.  

"The issuance is an important one as it signals a milestone in the development of local debt capital markets," says Mr Al-Fulaij.

Chinese Banks are waking up to the opportunities in the Gulf. China’s biggest bank, Industrial and Commercial Bank of China, has received approval from the Kuwaiti authorities to open a branch in Kuwait. The branch will add to the bank's network of branches in Doha, Abu Dhabi and Dubai, and is due to open by the end of April 2013. The China Development Bank also expressed an interest in opening a branch in Kuwait.

Kuwait's minister of planning, Rola Dashti, says that there are many investment opportunities in Kuwait for foreign investors. The opportunities include the establishment of three cities and other projects in electricity, water, telecommunications, ports, transport and infrastructure.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter