Foreign banks are gradually being allowed to enter Kuwait, a market where economic reforms have moved more slowly than many would like.
According to the governor of the Central Bank of Kuwait (CBK), Sheikh Salem Abdul Aziz al-Sabah, the move to allow a limited number of international banks and five Gulf Co-operation Council (GCC) banks to open branches is at the stage of approvals. Each of the GCC states’ national banks will be authorised to open “a single branch”, Sheikh Salem says.
First to enter are HSBC Bank Middle East, BNP Paribas (BNPP) and National Bank of Abu Dhabi. A few others are expected to follow, including Citibank and Standard Chartered. BNPP has started operations, and reports interest from local corporates keen to reduce their pricing.
Not surprisingly, the French bank is targeting big corporates, high net-worth individuals and fund management for Kuwait’s powerful government agencies – the key battlegrounds for the market’s established players and powerful incomers. It also sees potential in targeting smaller niche players who are looking for trade finance.
For Sheikh Salem, this shows the government’s “conviction to liberalise financial services and vary the structure of the banking and financial system in Kuwait to develop it as a financial hub and boost its financial and commercial ties with the outside world”.
Finance Minister Bader al-Humaidhi sees this as essential, to help address what he sees as the three main points of weakness in the Kuwaiti economy: the disproportionate state budget, the limited role played by the private sector and job market imbalances.
Reform is in the air, from overhauling public companies to giving women the vote. It includes the government promoting changes in the huge, traditionally secretive, Kuwait Investment Authority (KIA), which marshals oil-generated investments for future generations. Mr Al-Humaidhi recently observed that KIA had “taken several measures to control and minimise investment risks in its future strategies for offshore investment”. He said Mercer Investment Consulting had been selected to help KIA to redistribute its assets and revise its strategies.
Liquid market
It is a late start, but foreign banks are entering into a major Organization of the Petroleum Exporting Countries (Opec) market awash with liquidity. Indeed, the flood of cash from oil revenues has allowed the government to post huge budget surpluses in each of the past six years.
With $50-$60-a-barrel price tag, oil is expected to expand the economy by around 6% this year, “Kuwait is happy to spend the dollars as they come in, and pay the cash upfront for whatever new infrastructure is needed,” said one London-based Middle East specialist.
This means that the potential for developing project finance and other corporate operations is limited, even though big projects are in the pipeline.
The country’s major banks are not unduly concerned about this, as their traditional business is booming. Chief executive of the Bank of Kuwait & the Middle East (BKME), Michael Fuller, says the sector “is having a fairly buoyant time, based on a locally flourishing economy and the hopes of gaining an opening of trade with Iraq – though that is on the back burner right now”. He told The Banker he saw signs of movement in various sectors, “primarily [driven by] the oil price that gives the government a considerable surplus. A lot of economic activity stems from government expenditure in one sense or another, and things are looking fairly comfortable.”
Record profits
The country’s biggest bank, National Bank of Kuwait (NBK), reported a record net profit of $337m in the first half of 2005, a record 51% increase on the $223m recorded in January-June 2004. NBK’s return on assets rose to 3.6% and the return on equity to 35.3% respectively, with chief executive Ibrahim Dabdoub commenting: “Underlying this remarkable performance is the continued momentum across all business lines and an ability to leverage our strong financial position and liquidity.” NBK, he says, is exploiting its potential “in a favourable and active regional environment”.
While western forces remain mired in a difficult security situation, the Iraqi economy is slowly rebuilding, and Kuwait is a significant hub for this business. Trade Bank of Iraq is the institution established to kick-start trade finance after the US-led invasion in 2003. Run by a consortium of international banks, led by JPMorgan and including NBK, Trade Bank largely operates out of Kuwait City.
Announcing the bank’s first-half results, Mr Dabdoub commented on NBK’s “ambitious regional expansion strategy”. He pointed to the 2004 acquisition of a 20% stake in International Bank of Qatar, together with full management control, and the opening of a new branch in Amman, Jordan, and a 10th branch in Lebanon. NBK’s international network now takes in New York, London, Paris, Geneva, Singapore, Lebanon, Jordan, Bahrain, Qatar and Iraq.
This international growth is essential given the limited scope for expansion within Kuwait (where NBK has the largest network, with 48 branches) for a bank whose total assets were $18.6bn and shareholders’ equity stood at $2.3bn at the end of June.
Local trends
Other local banks report a similar trend. Gulf Bank’s first-half net profits rose by 11% to a record $125m, as Kuwait’s second-largest bank reported strong core earnings growth in all business areas. Gulf Bank said its net interest income increased by 12%, despite loan growth being severely curtailed by the introduction of a new Central Bank of Kuwait requirement for all local banks to implement an 80/20 loan/deposit ratio.
The 80/20 rule has made its mark on certain banks that were considerably in excess of the ratio, BKME’s Mr Fuller says, “but it didn’t affect us as we’ve remained within it”.
Overall, the Kuwaiti sector’s asset growth has been unimpressive, at just 1.7% in 2004. Mr Fuller says: “Clearly the central bank doesn’t want to see a sudden upsurge in lending other than for productive lending – the banks aren’t able or willing to flood the market with money, cheap or otherwise.” This is helping to produce stronger balance sheets and favourable results.
Other trends have had less impact. “Interest rates have, of course, increased here in common with elsewhere, but I don’t think it’s affected the level of economic activity in any discernable way – the stock market is still trending upwards,” Mr Fuller says.
Like other Gulf bourses, the Kuwait Stock Exchange is going through a period of boom. “There are occasional very small corrections but the trend has been on the up for quite a period of time now, so the level of business confidence is high,” Mr Fuller says.
Islamic development
The establishment of new Islamic banks is seen as a major development by Kuwait-based bankers. The well-established Kuwait Finance House (KFH), a significant player in regional project finance and other activity, has long held the beacon for Islamic finance in the country, while Islamic institutions have mushroomed in some of Kuwait’s neighbours, riding a wave of demand for ‘interest-free’ banking across the Muslim world.
The creation of a new Islamic institution, Boubyan Bank, has thus stimulated considerable interest even before it formally opens later this year. Boubyan has already transacted several deals, including taking a 20% stake in Bank Muamalat Indonesia, which Boubyan chairman and managing director Yacob al-Muzaini said he aimed to make “the strategic passageway to the rest of the east Asian nations”.
Wealth management is another growth sector. The ambitious Ahli United Bank (AUB) of Bahrain has a significant holding in BKME and, as Mr Fuller puts it: “Basically we outsource wealth management to AUB so they have a location – they serve both our customers and other banks with wealth management services. It’s a very important part of our plans for the future.”
Project finance
Kuwait remains something of a bystander, however, in the overall trend of GCC states towards raising major project finance facilities. According to data compiled by Dealogic, the volume of project finance in the Middle East/North Africa region increased from $11bn in 2003 to $18.5bn in 2004, but none of this went to Kuwait as the flood of oil revenues meant cash was king.
The major exception to this trend is Equate Petrochemical Company, which tapped the markets in 1997, and again for refinancings in 2001 and 2004, to build its Olefins II project, comprising an ethane cracker and an ethylene oxide/ethylene glycol plant. As The Banker went to press, the Equate sponsors – Kuwait’s Petrochemical Industries Company and the US’ Union Carbide Corporation – were about to send requests for proposals (RFPs) to banks for a financing facility to build a second ethylene cracker.
Equate first came to market in October 1997 for a $1.2bn loan, then refinanced this in November 2001 through a $900m facility arranged by Citigroup, KFH and NBK. It subsequently followed up with two bridge loan facilities totalling $637m, arranged by KFH and NBK.
The RFPs are eagerly anticipated, as cost estimates for the new cracker have ranged “anywhere between $1bn and $2.5bn”, the London banker says. The difference is due to recent sharp rises in contract prices. Société Générale, the project’s financial adviser, was not available to comment on this.
Equate returns to the market in an environment where “contractors are asking for more – engineering, procurement and construction contracts are sky-rocketing in price,” the London banker says, adding: “Nevertheless, Kuwait is seen by banks as a very good credit.”
This was apparent in a recent $100m, three-year corporate loan raised by Kuwait’s National Industries Group (NIG). This facility attracted 14 banks and carried a margin of just 115 basis points over Libor, for NIG’s debut in the syndication markets.
No pressure
According to John Dewar, a partner in law firm Milbank, Tweed, Hadley & McCloy’s global project finance department, project finance “hasn’t really caught on in Kuwait”.
Mr Dewar points to another financing raised for Kuwait, the Sulabiyah wastewater treatment project, which was the emirate’s first public/private partnership deal. But he says there is “far less need for the sort of infrastructure that the Saudis require, and so no burning necessity to bring the private sector in”.
Where this pattern may change, say bankers, is in the oil and gas sector, where Oil Minister Sheikh Ahmad Fahd al-Sabah forecast in late 2004 that as much as $40bn in investment could be required over the next 20 years. He emphasised that Kuwait Oil Company could not take on this challenge alone.
“Downstream gas, in particular, could require some project financing,” says another banker, citing plans announced by Qatar and Kuwait for a $2bn petrochemical project, which is to be supplied by a gas pipeline from Qatar to Kuwait, if Saudi Arabia allows the project to pass through its territorial waters.
Kuwait plans to invest some $10bn in the coming four years as part of its long-term strategy to rehabilitate and modernise oil sector infrastructure to boost output and export capacities to four million barrels a day (b/d) by 2020. In normal circumstances, this would suggest a project finance bonanza, but the feeling among banks is that the state coffers may hold sufficient cash to foot even this massive bill.
‘Project Kuwait’
Banks are watching with interest at developments in the long-awaited $7bn-$8bn Project Kuwait scheme, planned to increase oil production to at least 900,000 b/d from a cluster of four northern fields along the border with Iraq by using the technical expertise of international oil companies (IOCs). Three consortia led by BP, Chevron and Exxon Mobil are competing for the contract, whose legal and constitutional issues are currently being addressed by the National Authority.
The issue of IOC investment remains a sensitive one in conservative Kuwait. The authorities are structuring the project in such a way that Kuwait will retain ownership of reserves, control over oil output and strategic management of the venture. Bankers have speculated that because the winning consortium can expected to be paid on a fee, or possibly a buyback, basis, this may introduce some scope for the type of highly structured project financings seen in Iran, where similar considerations of national interest prevail.
