BNP Paribas is already operating there, National Bank of Abu Dhabi will follow soon and Citibank has just been given approval to open shop.
This demonstration of international interest is just one facet of a much wider surge in confidence in the prospects for the Kuwaiti financial sector as the economy gradually liberalises. International banks are entering the country thanks to long-awaited legislation that was passed last year.
Also telling is the news that Ahli United Bank (AUB) has committed itself to a major role in the Kuwaiti home market as part of a wider policy – spelt out in an interview last month with The Banker by chief executive Adel El-Labban – to create a pan-Gulf retail network. AUB, which is part locally owned but Bahrain-based and oriented towards opportunities across the region, announced that it was raising its stake in Bank of Kuwait and Middle East (BKME) to a dominant 75% holding. Management is already suggesting that the group may eventually purchase the remaining 25%, although no decision has been taken yet.
This sends out a message of confidence in the potential opportunities offered by a country that was hitherto noted for its restrictive economic conservatism.
The oil boom pouring cash into economies right across the Middle East is making international bankers think again about the Gulf but there are also specific national factors at play in Kuwait. Bankers point to a new mood among local investors now that the Iraqi military threat, which used to lie just over the northern border, has been removed. Kuwaitis feel less need to accumulate assets abroad. More money is staying at home, bolstering the domestic banking system’s liquidity.
Banks in proactive mood
After a difficult year adjusting to tough new lending rules, Kuwaiti banks, which are already fat with profit, are in positive and proactive mood. Meanwhile, the government’s economic liberalisation programme promises to bring new breadth and competition to the corporate financial services market, and to open up new business opportunities in other sectors, which banks will be able to help finance.
Kuwaiti banks feel in rude health. Bellweather of the sector, National Bank of Kuwait (NBK) announced on October 7 that its nine-month net profit had risen by 54% to KD155.7m ($533.3m), which was even higher than NBK’s full-year 2004 performance ($515m).
AUB expansion
This is the upbeat context in which AUB decided to expand its stake in BKME – hitherto 48% – and embark on a full merger of the two institutions.
AUB is already established in Bahrain and Qatar, and is a partner with Bank Melli Iran and Bank Saderat Iran in the October 2004 establishment of Future Bank. It will now become a serious player in the home country of its largest shareholder, Kuwait’s Public Institute for Social Security.
BKME has 18 branches, a 9% market share and historical origins traceable back to 1941. Even with AUB as a near-majority shareholder, until September BKME continued to operate as a separate institution with its own corporate strategy. It engaged in what management describes as a “complete relaunch” of brand identity and product range in March this year.
BKME transformation
With AUB’s increased stake will come changes at the BKME. Hamad Albulmohsen Al-Marzouq, MD of BKME and deputy chairman of AUB, says that the Kuwaiti bank will be merged into the AUB brand and integration should be completed before the end of 2005. “It will change BKME’s standing in the domestic banking sector, which will be completely transformed from that of a small bank with a small base and limited capital resources into part of a larger banking group with a diversified portfolio and banking products,” he says.
The new owner will bring financial strength, international connections and the latest information technology. Mr Al-Marzouq told The Banker that the new structure “makes a huge difference”.
For AUB the deal represents an important act of faith in the prospects for Kuwaiti banking. No-one suggests that the country will rival Bahrain or Dubai as a regional hub but the government’s decision to liberalise the banking sector does open the way to a considerable diversification – and internationalisation – of a market that is affluent, has a strong natural resource base and considerable scope for economic diversification.
“We anticipate that there will be demand for lending in the private sector,” says Mr Al-Mazrouq, pointing to the prospect of build-operate-transfer (BOT) projects in sectors such as power and desalination, or even tourism ventures such as the proposed development on Failaka Island.
Abdulmajeed Alshatti, chairman and MD of fifth-ranked Commercial Bank of Kuwait (CBK), is similarly bullish about the abundance of opportunities in Kuwait and the region: “The oil prices are helpful; the sentiment is good. I am optimistic that the whole region is moving into a good situation.” Mr Alshatti told The Banker in Washington that CBK has been developed into the second most profitable bank in Kuwait. “Our aim is to be the bank of choice for employment,” he says.
CBK is also keen on developing synergies with international banking groups and has recently signed a mutual co-operation agreement with Italy’s Sanpaolo IMI. Expanding bank opportunities coincide with overall economic expansion prospects.
Financing needs
There are ambitious plans for the development of Kuwait’s northern regions, which should be linked to the capital by a 22km bridge across Kuwait Bay. The planned revamp of the northern oilfields and a proposed aromatics plant could also generate financing needs. Even developments that are funded by the government are likely to generate numerous private sector spin-off projects.
In the past year, bank lending has been affected by Central Bank of Kuwait’s 2004 imposition of new ratios that are designed to limit exposure. The bank set a target ceiling ratio of 80:20 for loans to customer deposits. Although bank profits have been booming, the central bank was concerned that some institutions were over-exposed, with ratios as high as 120:20 in certain cases.
Not all players in the industry were above target: BKME and Al-Ahli Bank of Kuwait were already inside the new limits that CBK set. The main problem lay in corporate exposures, and a number of banks have had to hold back new lending or build up deposits to meet the new requirements. Growth in personal lending was also reined in, although to a lesser extent than financing for business.
However, now that the industry is broadly back inside the regulatory targets, there is a bullish mood. Bankers expect activity to pick up. They are once again in a position to finance new business ventures, which was not always the case a few months ago.
Fight for market share
In the hunt for a share of the new financing business, local banks will be potentially in competition with the foreign institutions that are moving into the country. In the shape of BNP Paribas, HSBC and Citibank, domestic institutions will be contending with some of world banking’s most experienced trade and project financing players. There could also be scope for forging alliances with these Western banks.
It is the Kuwaitis, though, who will continue to dominate the hugely profitable personal banking market.
Banks have faced some competition from the stock market, which is proving a highly popular alternative investment option for consumers. But a recent rise in CBK’s discount rate is already helping to attract some money back into conventional deposit accounts, according to one senior banker.
At NBK, the country’s largest bank, chief executive Ibrahim Dabdoub takes an upbeat view: “Consumer banking still offers lots of opportunities, with a young and growing Kuwaiti population, fast increases in employment and increased sophistication of customers looking for solutions.”
Banks are also seeking to cater for personal investors’ interest in the equity market. A senior manager at Al-Ahli says that his institution now has both a Kuwait Fund and an ABK Gulf Fund, the latter for those with an interest in wider regional opportunities.
BKME and AUB have been developing an online service that will allow personal investors to trade on bourses around the Gulf. “Kuwait has been online for nine months,” says Mr Al-Mazrouq. The Dubai and Riyadh bourses are due to be added to the system before the end of the year.
