This year, Kuwaiti banks all seem relatively strong, despite huge losses at Gulf Bank last year in derivatives transactions, but the same cannot be said for the 100 or more investment companies which have suffered significantly under the impact of the global financial crisis. Although some of the banks have been broadening horizons outside Kuwait, success at home is likely to depend on uncertain domestic factors such as political stability since the May 16 elections, the success of the recent financial stabilisation law and its stimulative impact on investment companies and the banks.
Although banks suffered an outflow of foreign bank liquidity in 2008, the authorities have filled liquidity needs with a lowering of cash reserve requirements, overnight one-month repos and dollar swaps. But credit expansion has been cautious due to uncertainties over the fate of investment companies, political direction, stock market declines and the softening real estate market.
Aggregate assets of Kuwaiti banks rose by 10.6% in 2008 to KD39.3bn ($142.3bn) and despite taking increased provisions, they remained highly profitable. National Bank of Kuwait (NBK), the Middle East's highest-rated bank, posted a net profit of KH255.3m in 2008, a 6.7% decline on $991m in 2007, but still a creditable 17.4% return on equity.
Big presence
NBK, which has the largest bank presence in Kuwait with 69 branches, as well as a growing regional and international network with an additional 86 branches across 17 countries, reported 10% growth in operating income in the first quarter of this year. Although taking extra general provisions, the bank posted healthy net profits of $218m and managed an improvement in return on equity to 17.9% for the same quarter.
NBK group chief executive, Ibrahim Dabdoub, is concerned by the political instability and the decline in projects. "Business is slow, we hope the government will start spending soon on projects," he says. On the international scene, NBK is enthusiastic about its recent regional expansion in Dubai, Egypt, Turkey and Qatar; Mr Dabdoub explains that the bank's international network, including 10 countries in the Middle East, now contributes 25% of the bottom line, and with continued expansion in markets such as Egypt and Turkey he expects this figure to reach 50% by 2012.
Globally, he anticipates the international imbalance will create a new world order, with China playing a key role. But although he believes the world economy may have now hit rock bottom, he says the recovery will only start at the end of the year and be very slow, not a sharp V-shaped recovery. Also, although Iraq represents a huge potential market and NBK has an expanding subsidiary there, in Credit Bank of Iraq, Mr Dabdoub says that inter-country trade is not there yet and business in Iraq is still to come.
KFH Growth
Kuwait Finance House (KFH), the country's other major bank, with total assets reaching $32.2bn in 2008, up 19.9%, has also displayed strong international growth in markets such as Turkey and Malaysia, as well as Saudi Arabia, where growth has just started. KFH Turkey, which expects to have 113 branches by year-end, also recorded 40% income growth in the first quarter.
At KFH, the largest Islamic financial institution in the Arab world, overall deposits grew by 23% in 2008 to KD6.6bn but profits fell by 46.3% to $633m in 2008, from $1180m in 2007, following impairment provisions which rose by more than 500% to $765m. The ratings agency Fitch downgraded KFH in early April due to concerns about these impairment provisions due to KFH's heavy exposure to Kuwait's distressed investment companies.
KFH chief executive Mohammad Al-Omar is keen for the government to start spending, for instance on the development of 80,000 units of public housing that are needed. Also, he is confident that most of the troubled investment companies are in a good position to qualify for support under the new stability law, thereby providing a strong economic stimulus. On the growth of Islamic banking, he stresses that differences in regional interpretations of Islamic products are good and he does not advocate standardisation of Islamic products across countries.
Significant disaster
Gulf Bank, Kuwait's third largest bank, suffered a disaster in late October 2008 when the bank incurred exceptional losses of KD375m in derivatives transactions at the height of the global financial meltdown. This led to a KD359.5m net loss in 2008, but with strong leadership from the central bank and support from the Kuwait Investment Authority (KIA), Gulf Bank raised KD376m in a rights issue in January, with KIA taking up the unsubscribed 16% portion.
Gulf Bank, which NBK tried to buy unsuccessfully after the crisis as its Islamic banking arm, now has a new board and is maintaining its focus on domestic, retail and wholesale banking. The derivatives incident, although damaging, did not upset Gulf's core businesses or franchise and the central bank was praised for its prompt action.
In December another crisis emerged when Kuwait's biggest investment banking company, Global Investment House (GIH), chaired by Maha Al-Ghunaim, defaulted on a $200m loan, triggering cross-default provisions in the group's other obligations amounting to about $2.5bn. It posted a net loss of KD257.6m for 2008 but, with HSBC as advisor, it presented a comprehensive restructuring plan in February to a 55-bank lending group, led by Germany's West LB.
Ms Al-Ghunaim admits to mistakes: "I was betting too much on decoupling and we got hit hard." Nevertheless, she is determined to make the restructuring work, insisting that GIH is not going under and had shareholder's equity of KD303.5m at end-2008. She says that the process will take months to overcome but Global began trading again in April. As one banker acknowledges: "GIH has the cash flow, has a sound business and should be fine."
For GIH and many of the other investment houses, much depends on how the new Financial Stability Law works in practice. Bankers consider consolidation among the investment companies is inevitable and some consolidation may also take place among the banks. NBK has permission to buy 40% of the small Islamic outfit called Boubyan Bank and it needs an Islamic bank, in order to expand its business. But like many developments in Kuwait at present, the future depends on resolving the political wrangling.
