The Kuwaiti banking sector has learned a great lesson in the immediate aftermath of the global crisis. Financial challenges began in the third quarter, when the central bank decided to increase banks’ reserve requirements. This stipulation limited liquidity and curbed inflation, which had reached an approximate 10.7% by July 2008 — almost 100% higher than 12 months before, when it stood at 5.6%. Global Investment House (GIH) reported that in the first nine months of 2008 profitability of the listed banking sector grew by 14% year-on-year. This was somewhat lower than GIH’s expectations of 16% but, with limited exposure to the infectious subprime crisis, Kuwaiti banks have stayed “relatively immune to the worst that the sub-prime mortgage crisis and what the ensuing debacle had to offer,” GIH said. Aftershocks of the sinking global markets took quite a toll on the Kuwaiti bourse, “which has lost substantial ground as yet,” noted GIH, “with little hope for any sudden respite.” Unfortunately, local banks that procure significant amounts of their bottom- lines from capital gains on investment securities are the ones who have been most affected by the circumstances.
Health in question
In October 2008, Moody’s credit rating agency registered doubt about the health of the Kuwaiti banking sector, due to fears of exposure to dwindling house prices as well as local equity markets. But the surpluses generated by record high oil prices earlier this year have kept the sector going. Kuwait’s economy is undiversified as more than half of its GDP hails from oil-related activities. This high dependency on oil and Kuwaiti banks’ high exposure to a shrinking property market are the main reasons why Moody’s gave the Kuwaiti banking sector a “stable to negative rating” in the fall. However, the credit rating agency’s recent report underlined that the overall operating climate within the banking system was “strong” because oil prices with net interest margins were also vigorous. Lending opportunities, however, are poor, leaving banks subject to real estate and construction sectors. For 2008, most of Kuwait’s top banks performed quite well, with the exception of Gulf Bank.
National Bank of Kuwait made up the highest contribution to the banking sector’s profitability, reporting a rise of 11% year-on-year by the end of the third quarter. Having the second largest contribution to the sector’s profitability, Kuwait Financial House exhibited results of 25% year-on-year growth. The Commercial Bank of Kuwait, the last of the three contributing musketeers, reported an earnings growth of 14% year-on-year in the first nine months of 2008. Gulf Bank regrettably reported negative earnings of 18% year-on-year for the same period, being the only bank in the country to do so. While most of the sector’s banks have not incurred unsustainable losses, they all witnessed one of its largest lenders, Gulf Bank, lose $1.4 billion as of October 2008.
That sinking feeling
Initially, the bank insisted it had only lost a few million dollars, but after an in-depth investigation by auditors and the central bank, the truth came out. This momentous loss has practically eliminated the bank’s Tier 1 capital. The worst development in this episode occurred on October 26 when the central bank was forced to step in and indefinitely suspend the bank’s trading on the Kuwait Stock Exchange (KSE). The lender explained that the losses were made up of “financial derivatives for its customers’ account, trading in financial instruments, as well as the provisions of loan and investment portfolios.” The money will now be recovered via an emergency capital subscription — the bank will issue 1,250 shares at a premium value of 200 fils ($0.73), permitting current shareholders first pick. The remaining unsold shares will be bought by the country’s sovereign wealth fund, the Kuwait Investment Authority. The bank’s old board has resigned and a new board will be elected on December 2, 2008. After the bailout of the bank, the Kuwaiti government ensured all deposits, while cautioning that concerns prevail over the well-being of the country’s banking sector. Such comments have not boosted customers’ confidence levels, as many have panicked and withdrawn large amounts of cash from their Gulf Bank accounts. While the bank’s operations have continued, its shares on the KSE have remained suspended until its restructuring is stabilized. However, Saleem Abdelaziz Al-Sabah, governor of the central bank, believes the Gulf Bank chaos is “under control.” But such obscurity has done next to nothing to restore investor confidence levels in the bourse. Around one quarter of the 200 listed companies on the KSE have dropped below 100 fils ($0.37) per share, driving confidence levels down across all sectors, including the country’s banking sector. Many feel that a lack of confidence — backed by a lack of transparency — is at the root of the crisis. Kuwait’s banks will need to tighten regulations and know when and where to invest better. While the Kuwaiti economy gets back on track in the next few months, banks are hoping to continue to perform relatively well, given the insipid financial conditions.