The banking sector in Kuwait did exceptionally well in 2007 thanks to a buoyant economy prodded forth by the rapidly growing oil wealth that is sweeping the region. In fact, it was not just last year, but the last few years that have been good for the small Gulf country. Between 2003 and 2006, the economy more than doubled and strong growth continues. Success begets success and the vast new wealth has spurred construction, resulting in a greater need for financing. This in turn has lead to a greater return in equity markets and corporate sector investments. It is thus no wonder bank profits have hit record levels across the board.
Although foreign banks like Bank of Bahrain and Kuwait, Doha Bank and Qatar National Bank have opened their doors recently in the country (the latter two just this year), there has been no real struggle for market share as the vibrant economy has been able to support all comers. Another minor concern about climbing credit levels has largely been swept under the rug by various analyses, including one from the IMF that called Kuwait’s banks “financially sound and effectively supervised.” Furthermore, it has called on the Central Bank of Kuwait (CBK) to reverse its efforts to quash credit growth. This may not be a bad idea as some reports suggest that Kuwaiti banks are so desperate to get around the regulations that they have taken to routing loans through foreign and non-bank financial institutions.
Nine Kuwaiti banks make up the local banking sector, with five more under partial or total foreign ownership rounding out the field. The local banks have done especially well during the last year. According to the Oxford Business Group, “growth is being driven by the continued strong expansion of banks’ credit books, underpinned by confidence in the corporate environment, new investment opportunities, strong consumer incomes and banks’ robust liquidity positions.”
The CBK seems to agree with the diagnosis in their fiscal year 2006/2007 report. Local banks (commercial, specialized and Islamic banks) had an aggregate balance sheet of $109 billion, compared to $88 billion the previous year, which represents a growth rate of 24%. The regulatory authority suggested that both assets and liabilities related developments played a role in the healthy bottom line.
On the assets side of the balance sheet local Kuwaiti banks saw a 25% (roughly $13 billion) rise in profits from private sector investments. Facilities, which account for more than half of all bank assets, grew by 18%. Growth in private sector loans resulted in 26% increase in profit for the sector.
Banks also did spectacularly well with funds invested with the CBK. Profits from accounts, deposits, bonds and others reached $13.8 billion, a whopping 210% increase on the previous year. This was largely due to the cashing in of a higher number of time deposits than the previous fiscal year. It is also worth noting that Kuwaiti banks’ holdings of treasury bonds fell by 11%. Foreign assets held by local banks were also down by .5%.
In terms of liabilities, only a couple of concerns exist. The local banking industry saw private sector deposits move up to $62 billion. The decline in foreign currency reserves has also been cited as a liability by the CBK. It is noteworthy that this growth in liabilities has not seriously affected asset quality.
A report by Global Investment House has suggested that the ratio of non-performing loans (NPLs) to gross loans fell from 4.4% to 2.6% from 2003 to 2006. In a further step to stave off sector deterioration, banks’ provisioning levels have climbed to 151% of NPLs. This move should help stem doubts about bad debt.
Other key moves by the country include the implementation of Basel II on December 31, 2005. The move came a year earlier than expected for Kuwait and two years before implementation for most of the other regional banking systems. Due to high liquidity and strong capitalization, the minimum cash requisites were easy for the majority of banks to meet.
Net profit of Kuwaiti banks ($ million)
Total assets held in Kuwaiti banks ($ billion)
Kuwait’s big seven
The top seven Kuwaiti banks by net profit are assessed here in terms of profit growth and total assets. While many of these banks have different profiles, whether they are conventional or Islamic, traditional or progressive, one generalization that can be made is that all of the banks listed here have seen sustained and substantial growth in profit over the last three years.
First on the list with total assets of $42 billion is the National Bank of Kuwait (NBK). It came in second in terms of profits, with a take of $998 million. This bank has seen profit grow by over $100 million per year for the past three years. Licensed in 1952, it was the first commercial bank, not only in Kuwait, but the entire Gulf region. NBK is a full service bank with a focus on retail banking resulting in the establishment of 63 branches. It has also recently acquired banks in Turkey and Egypt.
Second is the fully Islamic, Kuwait Finance House with assets worth $32 billion. This bank had the best showing in the country in terms of profits, which climbed over $1 billion. That is a $444 million gain on 2006 profits.
Gulf Bank comes in third in terms of total assets, with $18.5 billion, and claiming profits of $476 million for 2007. This represents just over 25% profit growth since 2006. Gulf Bank was incorporated in 1960 and the aesthetic of its branches reflect the bank’s “seafaring heritage.” Commercial Bank of Kuwait follows with $15.6 billion in assets and profits of $439 million. This bank is a great advocate of technology and has innovated a “loan over the phone” program and banking by SMS.
Fifth on the list, Al Ahli Bank of Kuwait counts its value as $10.8 billion and it took down a respectable $277 million net profit in 2007. It has 18 branches in Kuwait and one in Dubai. Further expansion in the near future is possible.
Burgan Bank has assets of $10.3 billion and $273 million in profits for 2007. The bank was wholly government-owned at founding, but in 1997 it become publicly traded with the government retaining 10% ownership.
Bank of Kuwait and the Middle East has $8.1 billion in assets and $273 in net profits. It is dedicated to mid and long-range financing for industry and agriculture.
Finally, Boubyan Bank checks in at $8.1 billion in assets. The bank is an exclusively Islamic institution and the youngest bank in the country as it was founded in 2004.
Forecast
Real GDP growth is expected to rise to 5.9% in 2008, which is slightly better than 2007. It does not approach, however, the 12.6% registered in 2006. Furthermore, inflation is expected to drop by over half a percent. Sustained high oil prices in the foreseeable future will encourage the economy and in turn the banking sector. According to the Oxford Business Group, one of the main risks to watch for is “the potential for a deterioration in asset prices, which would undermine loan quality, increase the risks of local real estate investments and further drive down non-interest income.”
The America-based subprime crisis and the resulting credit crunch pose little threat, as high levels of liquidity should stave off credit hunger. With threats largely under control and abundant opportunities, Kuwait’s banking sector looks set to see continued, sustained profit growth for the rest of the year.
Country forecast
