With another year of record profits in 2005, oil priced at about $70 a barrel and $20bn of domestic projects in the pipeline, Kuwaiti banks are experiencing boom conditions. Amid the exceptional performances, strong oil fundamentals and huge liquidity, however, Kuwait’s financial institutions also face key challenges in maintaining expansion, developing a stable capital markets infrastructure and getting major national projects, including Kuwait as a regional financial centre, off the ground.
Although bankers are bullish about the huge opportunities available, there are also many concerns over: the state of equity markets in Kuwait and the rest of the Gulf, where significant corrections have taken place recently; the bloated bureaucracy (which provides a drag on projects); corruption; and the adverse impact of the parliament on economic development.
“The challenge of the region is to improve the infrastructure of doing business,” says Hisham Al-Razzuqi, chief executive of Kuwait-based Gulf Investment Corporation.
Domestic concerns
Although Western observers tended to see the decline in Gulf stock markets this year, particularly in March and early May, as the natural and long-expected bursting of a market bubble, Kuwaiti bankers were worried by the broader political and social impact of the market falls on inexperienced retail investors, who incurred heavy losses. The concerns, however, were not so much with Kuwait retail investors (the Kuwait Stock Exchange (KSE) index fell a relatively modest 14.3% in March), but with more euphoric markets, such as Saudi Arabia and the United Arab Emirates (UAE), where declines were more dramatic.
“It is the end of irrational exuberance,” says Ibrahim Dabdoub, chief executive of National Bank of Kuwait, the country’s largest bank. Bankers noted that retail investors total three million in Saudi Arabia, while press reports say up to nine million Saudis – half the local population – have played the markets in the past three years, but most had not anticipated the Saudi market declining by 40% from February to early May.
The issue is seen as a social one in Saudi Arabia, one that could have a contagion effect elsewhere in the Gulf. Some bankers see these so-called corrections as having an adverse impact on the demand for credit and consumer confidence, producing a much more difficult consumer environment later in the year with a negative impact on bank results.
Intervention worry
Some also worry that governments may intervene if small investors are seen to be suffering, which could set a dangerous precedent. In early May, Saudi’s King Abdullah took the unusual action of reducing the already ludicrously low price of petrol (around 24 cents a litre) by 30% by year end as a means of improving the standard of living for citizens. In short, the king is worried about the ramifications of investors’ losses and some bankers can see the wider adverse impact of this throughout the Gulf economies.
In Kuwait, some other financiers are more optimistic. Hamad Al-Marzouk, chairman of Bank of Kuwait & the Middle East (BKME), believes that Kuwait banks will not suffer from the stock market falls. On the contrary, he says: “With so much liquidity in the market, it is likely that there will be another increase in equity markets across the region by year end.”
And Maha Al-Ghunaim, managing director of Kuwait-based Global Investment House, while admitting that valuations in some of the Gulf markets “had looked stretched” before the corrections, now notes that many stocks present good buying opportunities.
Besides stock markets and the prospect of the creation of a Kuwait Capital Markets Authority (see page 127), the Kuwait financial scene is changing in other ways with the return of foreign banks after a 35-year absence. Last year, BNP Paribas opened in May and was followed by HSBC in October and National Bank of Abu Dhabi. Citibank is expected to open this month. Although the foreign banks are limited to one location, making retail business impossible, they are expected to bring increased competition in corporate and investment banking, as well as in the payments and wealth management space.
Competition welcome
Some analysts suggest that Kuwait banks are worried about the new foreign competition but Gulf Bank chief executive Dr Yousef Al-Awadi takes a positive line: “We welcome HSBC and BNP. We have been frustrated by the conservative development of new products in the markets, such as derivatives. The foreign banks will help to extend the market for all banks and will help to make the overall cake bigger.”
For HSBC, Kuwait is familiar territory. It was the first bank in the country in 1942 and left on nationalisation in 1971. Although not present on the ground in Kuwait since then, HSBC has had a strong regional presence for years, mainly out of its headquarters in Dubai. According to the bank’s Kuwait chief executive Nick Nicolaou, HSBC has already built up a staff of 42 and is developing a comprehensive training programme. “We think we can add value. With our regional and global footprint, we can do a lot that local banks cannot do.” HSBC is likely to emphasise its sub-custodian capabilities for foreign investors among other services.
As well as the arrival of foreign banks and remarkable performances, led by Bank of Kuwait and the Middle East (BKME) and Kuwait Finance House with a 63% and 59.5% increase respectively in pre-tax profits, the consolidated assets of the 14 Kuwaiti banks, which now include the new Islamic institution Boubyan Bank, hit record heights in 2005. With rapid growth in credit and deposits, consolidated assets rose by 13% to reach Kd21.6bn at year end, compared with 1.2% growth in 2004.
As the banking sector expands and competition increases inside Kuwait and across the region, each of the major banks is developing its own strategy.
National Bank of Kuwait
National Bank of Kuwait (NBK), the country’s largest bank by far with a 35% market share in retail, again produced record pre-tax profits of Kd215m in 2005, a 36.3% rise on 2004. Under the leadership of veteran chief executive Ibrahim Dabdoub, NBK maintained its role as the premier bank in the Arab world, strengthened its dominant, domestic retail presence, increasing its branch network by four to 50, and strengthened its regional presence with the opening of a branch last month in Jeddah, Saudi Arabia. Mr Dabdoub hopes to enlarge the bank’s already extensive international network with new operations in Egypt and Syria in the year ahead.
The key development at the bank, in line with its regional expansion plans, was the creation of a separate investment banking subsidiary last July, NBK Capital, with capital of Kd15m, owned 90% by the bank and 10% by NBK management. NBK Capital chief executive George Nasra told The Banker: “We are building the largest and most talented team in the region from blue chip global financial services institutions and management consultancies. We currently have a staff strength of 40 professionals growing to 70 by Q1 2007, across three locations in the region – Kuwait, the Dubai International Financial Centre and Beirut.”
NBK Capital has a tight focus on investment banking (debt capital markets, financial advisory and equity capital markets) and traditional merchant banking (venture capital, private equity and mezzanine finance), and does not include in its activities asset management, project finance and brokerage, which stay within the bank. In emphasising his goal for NBK Capital to be the best mergers and acquisitions (M&A) house in the Gulf, Mr Nasra not only stresses the quality of his management team but also the new institution’s target market segment. “Our M&A focus is on deals between $50m and $500m, there is only one other player in this segment and the big international banks are not involved. It is a huge market opportunity and there is a gap in this space,” he says.
As well as establishing NBK Capital, the bank has restructured its asset management and investment services activities. One aspect of this has been the creation of the MENA Capital Markets unit. Omar Abdullah, who heads up the unit, has a mandate to develop and manage various investment and structured products focusing on equity and debt investments not only in Kuwait, but across the whole Middle East and North Africa region. “There is a lot of research around but not of the standard we want. The reason behind the new unit is that we believe the markets are getting deeper and wider, we don’t expect a meltdown, and we want to produce research of a higher quality.”
Kuwait Finance House
Kuwait Finance House (KFH), the country’s second largest bank and the largest Islamic institution, produced record earnings of Kd119m in 2005, up 59.5%, with net profits up a further 52% in the first quarter this year. With a 27% domestic retail market share, deputy general manager Mohammad Al-Omar predicts expansion of government spending in the years ahead and the private sector coming back to drive the economy, too. He also expects Kuwait to be an important mainstay for Iraq for years to come. While KFH and its sharia-compliant operations continue to perform well at home, increasing its network by three to 36 branches, it is also expanding its international operations and strengthening its role in the growing sukuk (Islamic asset-based security) market.
In February, KFH opened a subsidiary in Malaysia called Kuwait Finance House Malaysia. It already has an operation in Bahrain, a 70-branch operation in Turkey, recently renamed Kuwait Turk Participation Bank, and a 20% stake in Sharjah Islamic Bank. Mr Al-Omar also predicts that growth potential in Saudi Arabia and Oman will make KFH one of the largest Islamic institutions in the world with a significant and growing international network.
Gulf Bank
Gulf Bank, the third largest bank, produced six consecutive years of record growth with pre-tax profits up 14.7% to Kd88m in 2005. Gulf’s strategy, as chief executive Dr Yousef Al-Awadi told The Banker, is to focus on the local economy with a strong belief in both the retail and corporate sectors’ growth potential and international trade. Unlike others seeking expansion abroad, Gulf’s focus is entirely on Kuwait.
“We do not want to dilute our retail franchise by going outside our boundaries,” says Dr Al-Awadi, an experienced banker who headed the London-based Kuwait Investment Office in the 1990s. “If we go regional, we cannot compete in the region because the countries are overbanked and the multiples for acquisitions in Saudi Arabia, for example, are high.”
Gulf, which has a 16% market share in retail and more than 20% in corporate, has 35 branches and plans to open another 13 but much depends on getting the right locations in the highly competitive retail sector. The bank is seen to offer a wider range of products and services through a wider distribution channel mix that includes 70,000 online customers. Commenting on the strong growth, the bank says that it was achieved against the backdrop of the Central Bank of Kuwait 80/20 loan/deposit ratio that restricts customer lending to 80% of customer deposits. “The 80/20 restrictions not only slowed the year-on-year growth in net interest income, but also reduced the growth in the fee and foreign exchange income associated with credit growth.”
Commercial Bank of Kuwait
Commercial Bank of Kuwait (CBK), the fourth largest bank, had an outstanding year in 2005, increasing profits by 30.2% to Kd84m from all sectors of its business. With the second largest network of 43 branches, CBK has a 10% market share in retail and is expanding its corporate lending, especially in financing car dealerships. As well as increasing its domestic presence, chairman and managing director Abdulmajeed Alshatti says it is the right time to look outside Kuwait.
The bank has received permission to establish a branch in northern Iraq later this year and Mr Alshatti wants to increase its stake in Bahrain-based Bank of Bahrain & Kuwait (BBK) from 10% to a majority position. “We have received approval for the increase, we hope to gain control (of BBK) over the next year or two. Our idea is that opening a branch in an established market is useless, it is better to have a bank like BBK.”
Burgan Bank
Burgan Bank, the sixth largest in Kuwait, achieved a stunning 43.1% growth in pre-tax profits in 2005 to reach Kd43.8m. This growth has been reinforced by a 28% – Kd11.7m – increase in first quarter profits this year. Part of the KIPCO Group, which has $18bn under management, Burgan Bank carefully outlined its plans in Kuwait in early May and chief executive Jonathan Lyon forecast a further 21% growth in net profits to Kd51.1m for 2006, along with a 6% growth in customer loans and a 9% increase in customer deposits, reflecting enhanced expansion and productivity.
Bank of Kuwait & the Middle East
Bank of Kuwait & the Middle East (BKME), a smaller bank owned 75% by the Bahrain-based Ahli United Bank Group (AUB), produced a record 62.2% growth in pre-tax profits in 2005 to reach Kd46.7m. BKME, which has 20 branches and 10% market share, is strengthening its retail and private banking franchise in conjunction with its link to AUB, and is at the forefront of financial innovation.
Chairman Hamad Al-Marzouk told The Banker that BKME is the only bank in Kuwait (or elsewhere) to offer online trading on the US, UAE and Kuwait stock exchanges. He also shows how such live trading can be done on a mobile phone, a first in the region. Saudi Arabian and Egyptian markets are expected to be included by year end, he says. The trading is done through subsidiary, Kuwait & Middle East Financial Investment Company.
Among other innovations, BKME also offers the world’s largest cash prizes for customers maintaining deposits: every Kd50 balance maintained in a Al Hassad Al Rabeh savings account earns a chance to win Kd3m in prizes. Competition for deposits is intense.
Boubyan Bank
Boubyan Bank is the newest bank in Kuwait, formed in 2004. An Islamic bank, it is expanding fast at both domestic and international levels. According to general manager Fuad Al-Shehab, Boubyan expects to have 10 branches by year end and has taken a 21% stake in Indonesia’s largest Islamic bank, BMI. Boubyan has also set up the $150m Boubyan Real Eastate Sukuk Fund aimed at investing in time-share apartments in Mecca, Saudi Arabia, during the Hajj season. And in conjunction with Ryada Capital, it has launched a $150m Ryada Islamic Private Equity Fund for investments in the Middle East regions. Mr Al-Shehab notes: “Private equity is the essence of Islamic banks.”
