Competition remains controlled but foreign players are finally getting their feet in the door, adding healthy variety to Kuwait’s banking sector, writes Nadine Marroushi.

National Bank of Kuwait has evolved into a conglomerate with global reach that continues to dominate Kuwait with the largest market share by assets, but as the door pushes open to greater liberalisation, NBK and Kuwait’s other large traditional banks no longer have the market to themselves.

According to Standard & Poor’s, NBK controls a 35% market share in customer deposits, and 25% of overall lending. But the Kuwaiti giant is facing unaccustomed competition: Kuwait-based Global Investment House (GIH) says that a decline in its market share of total banking assets at the end of September 2006 to 26.6%, down from 28.5% at the end of September 2005, was due to increased competition as new players entered the fray.

Following NBK in terms of market share are the well-established Kuwait Finance House (KFH) and Gulf Bank. According to GIH, these three banks account for more 60% of total assets.

Overall profitability rose by 28.9% in the first nine months of 2006, and banking is generally regarded as one of Kuwait’s most robust sectors.

S&P’s Kuwait analyst Anouar Hassoune says: “Banks’ solid financial profiles, together with a fairly protected business environment and a supportive economic environment are the main drivers of the system’s creditworthiness.”

He adds: “Intrinsic financial soundness and high barriers to entry are expected to continue to protect Kuwaiti banks’ increasingly diversified earning streams in a booming economic context.”

The latest foreign bank to come on board is Qatar National Bank (QNB), which was granted a licence by Central Bank of Kuwait in December. This raises the number of foreign banks in Kuwait to six: HSBC, BNP Paribas, Citi, National Bank of Abu Dhabi, QNB and Bank of Bahrain and Kuwait.

Foreign obstacles

Foreign licence approval is relatively new in Kuwait, coming after parliament passed enabling legislation in early 2005. But foreign banks still face restrictions, including the requirement to maintain a 50% Kuwaiti workforce.

The proposed sale of Commercial Bank of Kuwait (CBK) – with 48 branches in the emirate – is likely to bring in significant new investment that will increase competition, especially should CBK, founded by an Amiri decree in 1960, go to a foreign bank. Analysts say CBK is looking for a regional bank to help with its overseas expansion plan.

It is not all one-way traffic. In March, the United Arab Emirates Central Bank granted NBK a licence to open a branch in Dubai’s International Financial Centre. In response, NBK chairman Mohamed Abdulrahman Al-Bahar called this “another successful manifestation of the feasibility of NBK’s plans for strategic expansion in the Gulf area and the Arab world”.

This followed the opening of a Saudi branch in May 2006 – noted for being the only Kuwaiti bank in Saudi Arabia – where NBK offers retail banking products as well as special banking services to high-net-worth customers and corporate clients.

With more than 55 branches in Kuwait, NBK also has a presence in countries including Iraq, with a 75% stake in Credit Bank of Iraq; Lebanon, via its NBK Holding subsidiary; Qatar, with a 20% stake in International Bank of Qatar; the UK, with NBK international and investment management; and operations in Asia and the US. NBK recently announced an initial agreement to buy 52% of Jordan’s Union Bank for Savings and Investment.

At home, it seems every month delivers something new for NBK, which in April launched an online stock trading service, in co-operation with Kuwait Finance and Investment Company (KFIC), enabling clients to directly transfer funds to a trading account and back to an NBK account without additional charge. It also allows investors to check their equities prices and portfolio status via KFIC.

In March, NBK launched an equity fund to invest primarily in Kuwaiti equities. Designed as a long-term investment vehicle, the minimum subscription is Kd30,000 ($104,000).

In February, the bank paid Kd20.8m for an 86.67% stake in Kuwait Financial Brokerage Company. Deputy chief executive Isam al-Sager says: “The acquisition aims to strengthen NBK’s brokerage activities and product offerings in the local market.”

NBK is a publicly listed company with a 16% share owned by the al-Kharafi family. Nasser Mohammed Abdulmohsin al-Kharafi, one of the world’s richest men through his international property company Mohammed Abdulmohsin Kharafi, sits on the board. The government owns a 3% stake.

Expat catering

International banks are still restricted over the type of products they can offer. HSBC Middle East chief executive Nick Nicolaou says his bank is “continually looking to provide innovative financial solutions for its clients... We focus on providing financial solutions for corporate, institutional, asset management, investment banking and private banking sectors both to local and multinational companies operating inside and outside Kuwait.”

Foreign banks cannot yet offer Islamic products. “In accordance with the terms of the foreign bank licence, we are only able to offer conventional finance in Kuwait,” Mr Nicolau told The Banker. “However, HSBC Amanah is a market leader in Islamic finance globally, and clients can access their products and services from other locations.”

S&P director Emmanuel Volland says: “There are a lot of foreign banks keen to enter the Kuwait market, but they face central bank restrictions. For example, foreign banks are only allowed to open one branch in the country, and this is why they have to focus on investment or corporate banking rather than retail.”

Recruitment is another challenge. HSBC’s Mr Nicolau says: “Trained local bankers are a constraint for a start-up business, especially with competition from other sectors, such as investment companies.” HSBC plans to establish its own graduate recruitment programme.

Looking ahead, Mr Nicolau observes that “global and regional competition is a major challenge, which will put pressure on local banks to consolidate and merge in order to be able to compete”. Most bankers and analysts canvassed by The Banker agreed with the HSBC executive’s observation that “levels of corporate governance need to be improved to international standards – adherence to Basel II and more international accounting standards will help address this”.

But the potential is huge. As Mr Nicolau concludes: “Large anticipated mega projects will require enormous amounts of capital to be raised, which will most probably come from the international capital markets – where foreign banks have a more dominant role to play.”

THE RISE OF ISLAMIC FINANCE

The competitiveness of Islamic banking in Kuwait is gaining momentum. According to S&P’s calculations, Islamic banks have a 28.2% market share based on total assets.

Three Islamic banks are operating in Kuwait, including KFH, part government-owned Boubyan Bank (BB) and recently converted Kuwait Real Estate Bank (KREB).

One more is set to join the pack, with the National Assembly’s Financial and Economic Affairs Committee’s recent approval of a draft law to establish Jaber Islamic Bank with capital of Kd100m. This new Islamic institution will be 24% owned by a government agency with the remaining equity held by Kuwaiti citizens.

BB, established in 2004, is also owned by the government through a 24% stake, and offers sharia-compliant commercial banking services.

KFH is pursuing an aggressive expansion plan in Malaysia to add to its existing two-branch base. KFH is said to be in talks with Malaysia’s state pension fund, the Employees Provident Fund, to take a 49% stake in RHB Islamic Bank. However, RHB Capital – the Islamic bank’s parent company – has said it is “unaware” of any talks.

KFH’s executive director Salman Younis has announced plans to open 50 branches nationwide, and analysts say that if the deal were to go through KFH would gain 200 branches.

Market analysts have noted that the deal may also help Malaysian banks set up in Gulf Co-operation Council countries.

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