Kuwait - Profitability of banking sector improves in first 9 months of 2006.
Banks in Kuwait continued to report strong profit growth in 9M2006, following a good growth in 2005 aided by strong credit growth and rising interest rates. High level of oil prices has also helped Kuwaiti banks in their performance during 2006. Aggregate assets of the banking sector increased from KD19.1bn in 2004 to KD21.6bn in 2005, registering a growth of 12.9%. The growth has been faster in the first nine months of 2006 by growing at 14.7% over 2005 to reach KD24.8bn. Claims on private sector continued to form the bulk of local banking assets, amounting to 60.8% at the end of third quarter 2006. Claims on government constitute 9.2% of the total assets, which witnessed a decline of 7% in first nine months of 2006, thanks to the diminishing in the value of public debt instruments. Private sector deposits constitute 59% of the total bank liabilities at the end of third quarter of 2006. The asset growth in first nine months of 2006 was mainly funded through the growth government deposits and quasi money, which is a part of the private sector deposits. Government deposits and quasi money grew by 37.1% and 24.6% respectively in the first nine months of 2006. This is a result of the rising interest rate environment that prompted a portion of investors to re-channel funds back into the banking system.
The credit facilities increased by 19.9% during 2005 compared to 2004 and increased by 17.5% in first nine months of 2006 compared to end-2005. Personal facilities constitute major portion of the loan to private sector i.e. more than 40%. Other sectors like real estate (21.3%), trade (11.5%) and non-banking financial institutions (10.2%) also form significant portion of the bank loan portfolio. For the first nine months of 2006, growth in credit was led by credit to non-banking financial institutions, which grew by 51.6% over 2005. Other sectors which witnessed high growth in the first nine months of 2006 include industry (34.7%), construction (26.5%) and installment loans (24.3%). The overall growth in loan to personal facilities was low on account of slower growth in purchase of securities. The loan to private sector was driven by purchase of securities, construction, real estate and non-banking financial institutions. Claims on the government fell by 7% during the first nine months of 2006.
National Bank of Kuwait (NBK) continues to retain its leadership position as the largest bank in Kuwait followed by Kuwait Finance House (KFH) and Gulf Bank (GB). However, the market share of NBK in total banking assets has declined to 26.6% at the end of September 2006 compared to 28.5% a year ago which is due to increased competition and entry of new players. But other big players like KFH and GB have improved their market shares in the year. The top three banks account for more than 60% of the total banking sector assets.
The performance of the most of the banks in Kuwait banking sector has improved during first nine months of 2006. The overall profitability of the sector was up by 28.9% in the first nine months of 2006 over the similar period in the previous year. Net profit growth was led by Kuwait Finance House, which grew by 56.2%, followed by Burgan Bank (BB) and Al Ahli Bank (AA) which registered growth rate of 48.4% and 40.1% respectively. Profitability of NBK, the largest bank, grew by 22.4% % in the first nine months of 2006 over the similar period in the previous year. Banks like Bank of Kuwait and Middle East (BKME) and Boubyan Bank reported marginal growth in the profitability by growing by 2.5% and 2.6% respectively. The only bank which saw a decline in its profitability in the first nine months of 2006 was Kuwait Real Estate Bank (KREB).
The competition in the sector is set to increase with entry of foreign players. CBK Board of Directors granted approval to Qatar National Bank (QNB) to open a full service branch in Kuwait during December 2006. This is the second approval for opening a branch of a GCC national bank after the establishment of National Bank of Abu Dhabi branch in October 2005. Three other foreign banks operating in Kuwait includes BNP Paribas, HSBC-Middle East and Citibank. BNP Paribas won the first license in August 2004 after the parliament passed a bill in January allowing licenses for foreign banks. The approval to QNB was in sync with CBK announcement 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% of the staff as Kuwaitis.
The competition in the Islamic banking area is also increasing. During December 2006, Board of Directors of CBK approved the application of the Kuwait Real Estate Bank (KREB) to switch totally to the Islamic banking. Earlier the CBK had delayed issue of an approval for switching to the Islamic system, until KREB finalizes naming senior staff members including the Chief Executive Officer (CEO). KREB will be third Islamic bank in the country, after CBK also broke the Islamic banking monopoly of KFH in 2004 by licensing the country’s second Islamic bank, Boubyan Islamic Bank. The Board of Directors of CBK has also decided to establish an Islamic Bank in 2007 with government as a major shareholder.
In the recent years, net spread has improved for the most of the banks in Kuwait. This was driven by the hike in the discount rate by CBK, which was in line with the increase international interest rates. A rising interest rate environment helped the banks because of their significant low-cost deposit base. Going forward, we believe the net spread will be maintained at the present level. Similarly most of the banks have witnessed strong growth in non-interest income during the period 2002-05 due to windfall investment gains and increase in fee-based activity. However on account of correction we have seen in the stock market in 2006, it will be difficult for banks to sustain same level of investment income, which formed a significant portion of non-interest income.
To meet the expected growth, Kuwait banks are planning to increase its branch network. Banks like NBK are also looking at regional opportunities. All banks are focusing on superior customer service and product innovation to deal with competition, which will increase with entry of new foreign players. Banks are engaging direct sales agent force to expand their reach. The Islamic banking sector in Kuwait will see increased competition in Kuwait with the establishment of new banks and increased pressure on the conventional banks to offer Islamic products through their separate divisions. This will require banks to adhere to the latest technological innovation in the banking sector, besides vigorously pursuing development of new products.