KUWAIT, 21 December 2003 — In the months that have elapsed since the end of the war in Iraq, Kuwait has witnessed increased activity in most of the sectors. Banking sector which had been amongst the best performing sectors of the economy, has seen increased profits from investments and balance sheet restructuring, despite the prevailing low interest rates.
According to a study conducted by Global Investment House, in the past nine months interest rates in Kuwait have more or less remained stable, despite reduction in interest rates in the US to 1 percent. However the average interest rates on Kuwaiti dinar and US dollar customer deposits with local banks (during financial 2003) seem to have declined for all maturities. This continued drop in interest rates does have an effect on the banking institutions in terms of their interest and investment income, but the decline has not affected the overall performance of banks as they have been able to restructure their balance sheet. Lower interest rates have fed growth in the loans and advances segment which increased rapidly, as consumer borrowing seems to have picked up during 2003.
Except for Burgan Bank, all other banks have improved their net profits in the first nine months of 2003. The profits of BB declined from 16 million dinars in the first nine months of 2002 to KD13.5 million in the corresponding period of 2003. On the other hand, The Bank of Kuwait and Middle East registered the highest growth in its net profits (77 percent) during this period, followed by Kuwait Real Estate Bank (47 percent). Low yielding and illiquid government debt bonds continue to affect the profitability of some banks.
The aggregate balance sheet size of local commercial and specialized banks, was higher by 10.22 percent during the nine-month period ending September 2003 as compared to the same period last year. This growth could be attributed to the improvement in the (liquidity) money supply which in turn has increased the local deposits with the banks.
On the asset side, time deposits with the Central Bank dropped a drastic -50.7 percent, while credit to the private sector had recorded a 18 percent growth in the first nine months of 2003. Interbank deposits had increased by 55 percent by the end of September 2003, offsetting the declines in other segments. Decline in the balance of local banks claims on the government was on account of the continuous decrease in purchase of debt bonds, which stood at KD885 million by the end of the first nine months of 2003. Because of the substantial increase in liquidity in the local banking system, local banking institutions have been paying back their foreign debt which in turn has led to the 13 percent decrease in foreign liabilities from KD2,031 million in 2002 to KD1,772 million at the end of September 2003. Foreign assets have also decreased but to a lesser extent (1.2 percent), declining from KD2,445 million in 2002 to KD2,416 million at the end of the third quarter of 2003. The loans and advances extended by the local banks to the different economic sectors grew 21 percent in the first nine months of 2003 to KD8,391 million.
The personal facilities segment continued to drive the credit market growth increasing at 22 percent in the past nine months. As of the end of third quarter, loans to personal facilities segment accounted for 38 percent of the total claims on the private sector. The real estate sector accounted for 17 percent of the total credit extended by the banks.
NBK has been able to retain its status as the largest banking institution in Kuwait, holding almost one third of the total assets and deposits of the banking sector. Also, NBK’s share of total loan portfolio of banks increased from 23 percent in 2001 to 27 percent in 2002. The Islamic institution, KFH, is the second largest in the domestic market controlling 15 percent of total assets in the local market. KFH and NBK together account for over half of the total bank deposits in the country. However, over the last two to three years, smaller banks have become stronger and more profitable and are now challenging the top banks for business. NBK and KFH continue to grow in strength as they have expanded their operations to Saudi Arabia and Bahrain.
The growth in earnings reported by the banking sector in the first 9 months of 2003, has been impressive. The net profits of the sector as a whole increased by 14 percent to KD257.3 million in the first nine months of 2003 as compared to KD226 million recorded in the corresponding period last year. Seven of the eight banks recorded positive performance in profit levels during the first nine months of this year. BKME registered the highest growth in net profits among the banks, being able to increase its profits by 77 percent to register KD14.5 million at the end of the third quarter of 2003 compared to KD8.2 million recorded during the same period of 2002. Burgan bank was, however, the only bank to record negative growth in its net profit which declined by 15 percent to KD13.5 million in the same period.
On the Stock exchange, the banking sector continued to underperform the stock market index. The sector achieved positive performance in terms of the value of shares traded registering a total of KD2 billion in the first nine months of 2003. Although the sector’s market capitalization increased by 44 percent, its share of the total market capitalization fell to 35 percent at the end of third quarter 2003 after reaching an impressive 43 percent in 2002. This decline was attributed to a higher growth in market capitalization of other sectors in the economy.