JEDDAH, 31 January 2006 — The Kuwaiti banking sector remains an important driver of economic activity after oil sector. It is expected to benefit from the growth of the economy. The banking sector continues to benefit from the high level of oil prices and the resulting positive business and consumer sentiment in the country. These factors, along with higher net interest margins, helped Kuwaiti banks to deliver strong earnings growth in 2004 and in 2005. Also close regulatory supervision and policy measures which liberalized the banking sector have catapulted the sector to be one of the strongest in the region. In order to achieve this, the Central Bank of Kuwait (CBK) announced major regulatory changes in 2004.
According to a report by the Kuwait-based Global Investment House (Global), the year 2004 witnessed the CBK opening up the sector and allowing three foreign banks to operate alongside the seven conventional commercial banks and the sole Islamic bank. France’s BNP Paribas won the first license in August 2004 after the Parliament passed a bill in January allowing licenses for foreign banks. Following that decision CBK has also given approval to the National Bank of Abu Dhabi and HSBC Bank Middle East to open branches in Kuwait.
In November CBK announced the registration of the National Bank of Abu Dhabi branch. Also, in September 2005, CBK had decided to give its initial approval to licensing a fourth bank that is Citibank. More licenses are expected in this year as other international banks such as Britain’s Standard Chartered is believed to have applied for Kuwaiti license. In another development in August 2005 Ahli United Bank (AUB) of Bahrain increased its stake in BKME to 75 percent.
CBK announced that banks of other GCC countries will be given top priority to open their branches in Kuwait. However, the license approval for any foreign bank should be within the guidelines regulating the banking sector in the state. The regulations implied that foreign banks wishing to open and operate branches in Kuwait are required to maintain 50 percent of the staff as Kuwaitis.
Though the market was adequately liquid and there was enough demand by virtue of the economic boom, credit facilities witnessed a slower growth of 17.9 percent and 12.8 percent respectively during 2004 and the first nine months of 2005 compared to the previous time period. This was mainly a result of CBK’s adoption of a tighter monetary policy by raising its discount rates five times so far in 2005, adopted as a way to manage the excess liquidity in the market so as not to have negative impact of pushing the price levels upward. Also, CBK mandating the commercial banks to comply with 80 percent loans to deposit ratio, led to a relatively chequered growth of credit facilities. The slowdown is evident from the latest available data from the CBK as quarter-on-quarter growth rates declined from 6.3 percent in first quarter of 2004 to 1.0 percent in fourth quarter.
The Global report said the effect of the CBK policies is reflected in the aggregate asset size of the banks too. Aggregate assets of the banking sector decreased from 20.3 billion Kuwaiti dinars in 2nd quarter to KD19.14 billion in 4th quarter.
However, in 2005, banking assets started picking up the pace to shift upward rising KD20.5 billion in third quarter, up from KD19.43 billion in 2nd quarter. Claims on private sector continued to form the bulk of local banking assets, amounting to 59.4 percent at the end of second quarter 2005. Foreign assets formed 17.2 percent of the total assets, with a relatively high quarter on quarter growth of 8.4 percent. Claims on government constituted 12.5 percent of the total assets, which witnessed a quarter on quarter decline of 2.2 percent thanks to the diminishing in the value of public debt instruments, reflecting the fact that government coffers are continuing their upward trend due to high oil prices. Finally, inter-bank deposits continued its upward trend for two consecutive quarters after three consecutive declines to grow at a quarter on quarter rate of 10 percent to KD1.018 billion by the end of third quarter 2005.
The asset growth was mainly funded through the growth in private sector and government deposits, which had quarter on quarter growth rates of 2.6 percent and 18.4 percent respectively to constitute 61 percent and 3.6 percent of total liabilities at the end of the third quarter 2005.
Despite a marginal slowdown in credit growth, banks in the country found enough opportunities in the market to keep their growth rates intact. NBK, which continues to retain its leadership position as the largest bank in Kuwait, reported record net profits of KD150.29 million in 2004 as compared to KD121.34 million in 2003. This performance was followed up in third quarter of 2005 with a 53.9 percent growth of net profit compared to the similar period in the previous year. Kuwait Finance House, the second largest in the domestic market, controlled 20 percent of total assets. KFH and NBK together accounted for almost half of the total bank deposits in the country, showing that Kuwaiti banking sector is still concentrated, despite smaller banks becoming stronger and more profitable in the last two years.
As a result of the operational and credit quality improvements, the Global report said all 8 banks saw improved profits during the first nine months of 2005, with the aggregated sector profits up by 49.8 percent, over the similar period in the previous year. Net profit growth rates for the first nine months of 2005, which ranged from 11 percent to 91 percent, was led by KFH (+91.0 percent) followed by BKME (+79.1 percent), and Al Ahli Bank (+67.3 percent).