While the global financial crisis was felt across all the Gulf countries, Kuwait’s economy was the worst hit. Its gross domestic product decreased by 4.8% in 2009, significantly more than the United Arab Emirates’ 2.5% contraction, which was the second worst in the Gulf, according to the International Monetary Fund.
In February 2010, the Kuwaiti government unveiled a five-year $130bn economic development plan (EDP) that outlined 1100 projects aimed at kick-starting the economy. But the EDP’s efforts to date have proven to be somewhat lacklustre; in 2011, Kuwait’s economy grew 5.7%, less than one-third of Qatar’s 18.7% growth and significantly lower than growth in other Gulf countries.
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The government undershot its spending targets in the 2010/11 fiscal year – implementing an estimated 60% of the targeted Kd5bn ($17.97bn) infrastructure expenditure. This is nothing new. Kuwait has underspent its annual budget by an average of 9% for the past 10 years. The blame is largely levelled at Kuwait’s parliament for its slow progress in pushing through the EDP. Constant political infighting makes it difficult for consensus to be gained on projects, which has resulted in the cancellation or delay of several contract awards.
The EDP was hailed as an engine to drive private sector growth and accordingly generate new demand for banking activity, but its constant derailing is prompting Kuwaiti banks to refine their growth strategies, with many looking abroad to generate new revenue streams.
NBK’s MENA focus
“Given our dominant position in Kuwait, our growth potential will be limited to the growth of the local economy. We don’t expect high growth in 2012 because the primary mover of economic activity in Kuwait is government expenditure and it has fallen short of our expectations,” says Ibrahim Dabdoub, group chief executive of National Bank of Kuwait (NBK). “Our experience in international markets also showed the limitations on growth as our business in London, New York, etc..., is still tied to Kuwait in one form or another. Thus, our refocus on the region today.”
The only significant growth we have had since the start of the unrest has been in GCC markets
NBK was one of the pioneers in the Middle East and north Africa (MENA) region when it established a presence outside its home market in the 1980s. In 2004, the bank took the strategic decision to widen its presence to become the leading regional bank in the MENA region. Its expansion strategy was focused on the countries in the region that combine high-growth economies and the right demographic trends. In the following five years, NBK entered six new markets: Qatar, Jordan, Egypt, Saudi Arabia, Lebanon and the United Arab Emirates. By 2012, NBK had opened operations in 17 countries and four continents with 118 branches outside Kuwait and 69 inside the country.
“The MENA region remains our top priority in 2012, but we are concentrating primarily on the Gulf Co-operation Council [GCC] economies, where we see substantial opportunities emerging as the various government spending programmes get implemented. We have received approval to open our first branch in Abu Dhabi and we are doing very well in Qatar, where the market is booming,” says Mr Dabdoub. “The only significant growth we have had since the start of the unrest has been in GCC markets. Against this backdrop, the bank’s expansion plans to grow beyond the countries where we currently have a presence are currently on hold. Islamic banking in Kuwait is also among our priorities and our stake in Boubyan Bank was a very successful strategic move.”
Islamic finance promise
Islamic banking has been gaining ground in the Kuwaiti market in recent years, undergoing double-digit growth during 2010, albeit from a low base. It comprised one-third of total banking sector assets and deposits as of June 2011. Aware of its strong growth prospects, NBK’s strategy of diversifying into Islamic banking gained further traction in 2010 with the lender raising its stake in Boubyan Bank to 47.3% from its previous 40% in 2009. It hopes to raise that stake to a further 51% in the future.
Boubyan currently operates 20 local branches, little more than one-third the number operated by the country’s largest Islamic lender by asset size, Kuwait Finance House (KFH), which has 54 domestic branches. Boubyan aims to increase its network to 30 branches by 2014.
In 2004, the 49% government-owned KFH was the only bank offering sharia-compliant services in the country. Including Boubyan, three new Islamic banks have since opened. Growth prospects are strong for the industry – assets under management at regional Islamic institutions are forecast to double to $999bn by 2015 from $416bn in 2010, according to consultancy firm Ernst & Young.
In light of the burgeoning competition and after years of declining profits, in January 2012 KFH’s board of directors approved a new five-year strategy which it hopes will help effect a turnaround in the bank’s performance. The lender’s 2011 profits fell 24% year on year as it set aside money to cover losses on investments. In November 2011, it was reported that Saudi Arabia’s Al Rajhi Bank had begun preliminary talks with private and public sector stock owners of KFH on buying an ‘influential share’.
“We are beginning a new era at Kuwait Finance House,” says Samir Al-Nafisi, KFH’s chairman. “The Islamic banking market is becoming more competitive. This new strategy will enable us to strengthen our relationships with customers while delivering value to our shareholders and ensuring that we continue to stay one step ahead of the competition.”
The Islamic banking market is becoming more competitive. [Our] new strategy will enable us to strengthen our relationships with customers while delivering value to our shareholders and ensuring that we continue to stay one step ahead of the competition
The bank hired international management consultancy Booz & Company to help it devise the strategy which is centred on three strategic pillars. The first hopes to improve the bank’s domestic performance by focusing on strengthening sales and service to target customers. The second aims to enhance KFH’s investment business by increasing control, optimising returns and better managing risk across the bank’s multiple investment subsidiaries. The third will see the bank leverage its international presence more effectively and generate synergies across its banking operations in Malaysia, Turkey and Bahrain.
KFH restructuring
Further to the new strategy and in the wake of its annual general meeting in March 2012, KFH announced a radical restructuring that will see it shuffle its top management and sell, merge or restructure unprofitable subsidiaries. The bank now lists 15 subsidiaries on its balance sheet, as well as five companies in which it has direct stakes. KFH has declined to disclose specific assets that will be sold, but in early April 2012 it announced the sale of 20 plots of land in southern Kuwait, realising a profit of Kd10.19m.
Underperforming assets and bad loans continue to plague KFH’s balance sheet – provisions totalled Kd556m in 2011, a marginal increase on the group’s 2010 provisions of Kd552m. The new plan hopes to boost the bank’s flagging share price, which has dropped by almost 25% over the past year, by reducing duplication and increasing productivity.
“There have been a lot of changes in the economic environment since the 2007 subprime crisis, hence why we have revisited our overall strategy,” says Mohammed Al-Omar, chief executive of KFH. “KFH has a very conservative approach so we don’t do expansion by acquisitions but through organic growth. We are benefiting from our presence in both Turkey and Saudi Arabia. But our penetration in Turkey is less than 2% so there is huge room for growth there and likewise with Saudi Arabia. We don’t have a bank in Saudi Arabia – we have an investment company that is fully licensed by the Saudi Arabian Monetary Agency and a real estate company.”
Saudi Kuwait Finance House was set up in November 2008 with a capital of SR500m ($133.3m) and with its operations focused on securities and launching investment funds. At the same time, KFH established a real estate company with a capital of SR2.5bn to participate in big projects offered to the private sector.
KFH is also eyeing up investment opportunities in Morocco in light of the government’s plan to issue a decree by the end of 2012 governing Islamic financial operations in an effort to diversify its sources of income and meet the growing demand for sharia-compliant instruments. In April, KFH received an official Moroccan delegation that included government officials, and the Moroccan ambassador to Kuwait, Yehia Banani, has said that the government is now looking to form a strategic partnership with the bank to draw on its expertise. For example, the government is considering issuing sukuk (Islamic bonds) to finance major projects in various fields including infrastructure, power, real estate, tourism and industry, and KFH has expressed its enthusiasm for such work.
We are looking to expand our footprint, scale and capabilities through strategic acquisitions while also growing our market share organically. We are eyeing four markets – Turkey, Saudi Arabia, the UAE and Egypt
Sukuk issuance is predicted to rise by 50% globally in 2012. According to data provider Thomson Reuters, Middle Eastern debt issuance reached $11bn during the first quarter of 2012, nearly double the $5.7bn raised during the same period in 2011.
Burgan’s regional expansion
Meanwhile, Burgan Bank has recently consolidated all of its holdings under the Burgan Bank Group title in an effort to build a regional brand. Its regional footprint comprises 145 branches through its four majority-owned subsidiaries: Jordan Kuwait Bank, Gulf Bank Algeria, Bank of Baghdad and Tunis International Bank. Jordan Kuwait Bank has also a presence in Cyprus and the Palestinian territories, while Bank of Baghdad has a fully fledged branch in Lebanon.
“Our current international strategy is to grow through both organic and inorganic growth,” says Eduardo Eguren, chief executive officer of Burgan Bank Group. “We are looking to expand our footprint, scale and capabilities through strategic acquisitions while also growing our market share organically. We are eyeing four markets – Turkey, Saudi Arabia, the UAE and Egypt.”
On April 9, 2012, Burgan Bank announced that it was acquiring Eurobank Tekfen, the Turkish subsidiary of Greece’s third largest lender, Eurobank, for $359m. The deal is scheduled to be completed in the third quarter of 2012.
Burgan Bank Group delivered an impressive performance in 2011, achieving net profits of Kd50.6m – a ten-fold increase on the Kd4.7m posted in 2010 on the back of a well-executed corporate strategy. This has focused on improving its top-line performance, reducing the cost of credit and maintaining the growth trajectories of its subsidiaries. The bank’s domestic presence consists of a network of 25 branches and 97 ATMs.
“Our core market is very important to us and we strongly believe that there is large space for growth,” says Mr Eguren. “Our 2012 focus will be on winning more market share without compromising profitability and repositioning our retail bank in Kuwait. Currently our retail operations are not contributing to the profitability of the bank – it is in a break-even proposition – and it is a young and small franchise compared to our peers. On the back of our 2011 financial results, we can now invest in the retail bank and turn it into a profitable proposition.”
