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Maha Al-Ghunaim |
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The offices of Global Investment House, one of Kuwait’s leading investment companies, are decorated in a striking mix of bright blue, canary yellow and steel grey, a colour scheme that has even been picked up in the pictures on the walls.
This sort of vibrancy is not normally seen in the emirate’s financial institutions, which have a preference for sober wooden panelling. The choice of a style more often seen in a modern design company is a conscious statement by Global’s management.
“We want to show that we are different, young, aggressive and dynamic. People either like it or hate it but they always remember it,” says Maha Al-Ghunaim, Global’s vice-chairman and managing director.
She is an example of a new breed of dynamic investment banker – working in both the conventional and Islamic sectors – that is breathing new life into what until recently had become a moribund financial industry.
Investment houses, such as Global, are introducing new products including Kuwaiti dinar money market funds. Global has also introduced local and international equity funds and has played a lead role in arranging new issues on the local bond market.
“We try to do things that have not been done before by others. We try to do things that suit our customers. We were the first to launch a money market fund – we have been followed by three other institutions – and we led the way in publishing research on listed companies,” says Al-Ghunaim.
And there are even the first signs of competition in the retail banking sector, which has been dominated for a generation by the National Bank of Kuwait (NBK).
NBK’s veteran chief executive, Ibrahim Dabdoub, is not yet quaking in his boots. His bank still has 40% of the retail market and the strength of its international reputation – it is one of the highest-rated banks in global emerging markets – was demonstrated by the success of a recent $450 million Eurobond. Uniquely for the Middle East, the bank’s rating of A2 from Moody’s was two notches above the sovereign risk. This enabled NBK to raise money at only 25 basis points above Libor even though Kuwait is 100% risk rated.
However, there are signs that some of the other institutions are trying to cast off their inferiority complex and will present the toughest challenge to NBK’s pre-eminence for years. All the leading banks are developing more competitive products and services, including internet banking. Gulf Bank, under new ownership and management, has delivered a 19% increase in profits and Burgan Bank, which is still the subject of takeover rumours, has successfully introduced Beee, its internet banking subsidiary.
Even the Bank of Kuwait&the Middle East (BKME), until recently dismissed by its rivals as the least active and most conservative of the emirate’s institutions, is planning to adopt a more aggressive strategy. This is a direct consequence of the purchase of a 20% stake by Ahli United Bank (AUB), which is planning a full takeover.
“We must become more aggressive in building the bank’s assets – we must increase the bank’s loan and investment portfolios,” says Hamad Al-Marzouq, chairman of the executive committee at Ahli United Bank and its representative on the board of BKME.
Islamic banking, which until now has been dominated by the majority state-owned Kuwait Finance House (KFH), is also expected to become more competitive. The most significant development has been the merger between Kuwait-based investment house The International Investor (TII), and pan-Gulf retail institution Darrah Al Baraka. Bankers say the new institution could mount a significant challenge in Kuwait to Kuwait Finance House, which has itself been on the acquisition trail, buying a 20% stake in the National Bank of Sharjah. And, with a growing number of investors looking to place their money in Islamic banks, several investment companies, such as First Investment, have been set up in the past five years to meet this need.
Perhaps it’s best not to get carried away. The Central Bank of Kuwait has, for example, wanted for at least a decade to reduce the number of commercial banks from eight to four. But despite changes of ownership there is little sign of consolidation.
One senior Kuwait banker leans back in his chair and roars with laughter at the suggestion that there is a new dynamism spreading through the whole banking sector. “Tell me where you have seen this remarkable change and I will look for myself,” he says. Another notes: “We are still living in a world where some financial institutions seem to exist to provide their boards with prestige and salaries rather than their customers with services.”
Despite these reservations, there are opportunities for banks that have modernized their management, though there are conflicting signals about the prospects for Kuwait. On the positive side, the market is extremely liquid. First, there is more money around. Higher oil prices, until September, and the payment of $1 billion in Gulf War compensation from the US, have earned more money for the public and private sectors.
Secondly, there is anecdotal evidence that money that has traditionally been immediately invested in western markets and property is being kept in Kuwait in increasing amounts. This is a result of the collapse in western stock markets and lower US interest rates – traditionally Kuwaiti dinar interest rates have been lower than those for the dollar but there is now a 250bp spread between the two rates. In addition, since September 11, there has been nervousness about the vulnerability of Arab deposits to random seizure by western authorities.
How long will the boom last?
One of the main beneficiaries of this has been the Kuwait Stock Exchange (KSE), which last year was the best-performing market in the region, rising by 27%. The KSE’s progress has been helped by the government’s decision to allow foreign direct investment in it, though, given the volatility and large amount of cross-holding, most overseas stakes are likely to be taken through local equity funds.
| Ibrahim Dabdoub | ||||||
The central bank has also relaxed some of its regulations to enable banks to make more consumer lending. One of its main concerns has been that financial institutions’ deposits are short term – typically one to three months – while the lending profile has gradually extended to the extent that for the first time banks are offering 20-year mortgages.
As a result, the central bank has insisted that only 12% of deposits can be used for retail lending – for every KD12 million a bank wants to lend, it would have to raise KD100 million, leaving it with the difficult challenge of finding ways to invest the balance.
However, the central bank now allows banks that raise money for three years or more to lend up to one-third to the retail sector. This was one of the reasons for NBK’s decision to raise a bond while others, including Gulf and Burgan have used the syndicated loan market for the same purpose.
Set against this is the global downturn, which has led to a fall in oil prices that is threatening to put Kuwait’s finances back into the red. Bankers point out that the fall in interest rates in the past year is unlikely to be repeated and that compensation payments from the US were a one-off event. There is also the political uncertainty caused by the renewed tension between the US and Iraq. This, one banker notes, “can never be good for the region”.
It is also likely that a significant proportion of the money repatriated to the region will once again find its way back to western markets. “In September there was an immediate reaction of withdrawing funds from the US. But that was a natural reaction and most funds are now returning to the US,” says NBK’s Dabdoub.
Another concern for government and business organizations is the failure of all measures taken so far to reverse the trend towards greater government domination of the economy. Some 20 years ago half the Kuwaiti population worked in the private sector. This has now shrunk to little more than 5% despite a campaign by the state’s Kuwait Investment Authority (KIA) to sell some of its shareholdings. Despite the government’s commitment to privatization, the legislation needed to make this happen is still mired in the parliament.
Despite these pressures the banks have produced good results, with NBK, the one Kuwaiti financial institution with a major international presence, producing earnings of $342 million in 2001 compared with $325 million the previous year. “We did this even though conditions were quite tough – the global economy was going through a recession and the local economy was flat,” says Dabdoub.
Dabdoub, who has earned respect for the way he has steered the bank through local and international financial and political crises, and, in every year but one has delivered increased profits, has maintained a consistent drive to modernize and make NBK more efficient. “We have 40% of the market locally and we can only capitalize on our profitability, particularly through the use of technology and fine-tuning our branch network,” he says. “In 1990, our profit per employee was $58,000 and it is now $320,000 and our branch network has been reduced from 65 to 41.”
Dabdoub believes that the bank can maintain its lead by offering asset management – not just for the richest customers but also for those lower down the wealth ladder. “We have $5 billion funds under management through our bank in Geneva, which looks after private clients, and through an agreement with Morgan Stanley, which looks after institutional money. We also do retail funds in Kuwait,” he says.
The other local banks are not yet looking to challenge NBK’s position in the international market but the greater emphasis on service and the growing diversity of what is on offer means that there is real competition in the local market for the first time for many years. For example, Gulf Bank, the second-largest bank in Kuwait, last year produced record profits of $137 million and its management are talking bullishly of taking more business from NBK.
Major changes have been introduced in the retail sector, including the introduction of 22 new products and services, including internet and telephone banking. “Gulf Bank has been through a major restructuring in the last couple of years. Our focus has been customer driven and we are determined to be a customer-driven organization,” says Bassam Yusuf Alghanim, the bank’s chairman and managing director.
Alghanim believes that there is scope to provide better service for all Kuwait’s bank customers. “My background is in retail and the banking business is behind the retail sector in terms of delivery of service,” he says.
Burgan Bank, privatized four years ago, is also entering the retail and commercial sector, having previously specialized in large government transactions. “Since 1998 our focus has been to build on technology by launching an internet bank – Beee Bank – which would differentiate us from the other banks in the market,” says Rod Goom, Burgan Bank’s chief general manager.
Some bankers believe that it will be hard to build an internet bank because Middle East nationals have traditionally preferred to visit branches and to conduct a significant proportion of their business in cash. But Goom says that “60% of the population is under 25 and have been brought up on technology”.
Goom also hopes to use internet banking as a way for Burgan to expand throughout the Gulf. Banking in the region has been constrained by the determination of governments to preserve home markets for their leading national banks. But financial services competition rules laid down by the World Trade Organization – of which all Gulf states except Saudi Arabia are members – and the realization that larger banks are needed to compete in local markets, has forced a gradual relaxation of these rules.
NBK, which has the strongest local presence and a major international operation, has little regional business. Its strategic alliance with National Commercial Bank in Saudi Arabia has so far failed to deliver the results that NBK hoped for. NBK has also abandoned plans to buy a small Egyptian bank.
All the leading Kuwaiti banks are on the lookout for mergers and acquisitions in the Gulf, with partnerships with Bahraini banks possibly highest on the list. But the most significant recent development has been the purchase of the 20% stake in BKME by Ahli United Bank, which now has ownership of, or stakes in, banks in London, Bahrain and Kuwait.
The rush to Islamic banking
While competition between the conventional retail banks intensifies, they are also facing a growing challenge from Islamic financial institutions. Islamic banking is one of the fastest-growing sectors in the Middle East with customers wanting to combine a good return on their money with banking practices that conform to their religious principles.
KFH has dominated this part of the Kuwait market for a quarter of century and has signalled its intention of expanding regionally by buying a 25% stake in the National Bank of Sharjah, which it will transform into a Sharia-compliant institution by the end of the year. “In the local market, we are introducing internet banking and making car purchase finance easier. We are introducing a number of new accounts. If you see the returns we pay our clients, it is way above what some conventional banks pay,” says Mohammed Al-Omar, assistant general manager, investment, at KFH.
KFH, which is the second-largest Islamic financial group, is, however, itself facing tougher competition from the merger of Kuwait-based The International Investor and the Dallah Al Baraka Group, which has operations across the Middle East.
This new group, which will be the first Islamic institution to offer the full range of investment and retail banking services, will be the third-largest Sharia-compliant institution, with a $350 million equity base and $3.2 billion in assets.
A partner at TII, Issam Al Tawari, says that the merged group aims to be “an institution that will have the experience, brand power and economies of scale successfully to exploit the growing opportunities in Islamic banking and become a major global player as a full-service Islamic banking group”.
Bonds are the next big thing
In the boardrooms of Kuwait, bankers and businessmen are increasingly talking about raising money on the bond markets. Although still dwarfed by the bank credit and equity markets, the bond market is becoming an increasingly attractive place for investment and fund-raising.
National Bank of Kuwait (NBK) recently became the first Kuwaiti company to tap the Eurobond market, and a growing number of banks and companies are raising money in Kuwait dinars.
The most significant development was NBK’s three-year Eurobond. The bank was able to raise $450 million (there were $510 million in applications) even though it was extremely tightly priced at 25 basis points above Libor and was for an institution in a country that was 100% risk rated.
Most of the bond was sold to Middle East institutions, with some sales to European and US banks with which NBK has banking relationships. Ibrahim Dabdoub, NBK’s chief executive, attributes its success to the bank’s rating (at A2 from Moody’s it is two notches higher than the sovereign) and the liquidity in the local market.
Another key factor was the scarcity of quality Middle East paper – it is the region’s only liquid benchmark for a non-sovereign. Apart from Lebanese bonds, which are mainly sold to domestic institutions, the only bonds with any international appeal are two Qatar sovereign bonds and one for Egypt.
NBK raised the bond, which effectively replaces a three-year syndicated loan that matures this year, because of the attractiveness of the price and its desire to have a rating and international exposure. It can also lend 30% of this longer-term money to the retail sector, whereas it can only lend 12% of its short-term deposits.
Bankers also expect another active year in the local bond market, where Commercial Facilities Company is expected to raise $18 million and Financing Services Company has announced a $15 million bond. At the end of 2001, there was a total of KD215 million-worth ($700 million) of bonds outstanding.
The market still has a long way to go before it reaches the heights of the late 1970s and early 1980s when it regularly attracted international organizations, foreign municipalities and sovereigns. Although a series of Central Bank of Kuwait interest rate cuts has made the market attractive to local borrowers, they are still higher than US levels. When the Kuwaiti dinar market was at its peak, foreign borrowers could raise money more cheaply than in dollars in a currency that offered little or no exchange risk. The market is also further handicapped by an almost complete lack of secondary trading.
However the nine issues over the past two years, including KD30 million for Burgan Bank, have provided an opportunity for recently established investment houses. Global Investment House has, for example, lead managed issues for Burgan Bank and Kuwait Financial Services. “We are currently negotiating with three or four companies that want to issue bonds,” says Maha Al-Ghunaim, Global’s vice chairman and managing director.
Global has also been active in launching stock market and money market funds to invest in Kuwait and regional markets. Al-Ghunaim expects an increase in interest in the Kuwait Stock Exchange following the government’s decision to open it up to foreign investors and a 27% increase in market capitalization in the past year. The market is also showing some signs of stable growth, which, bankers hope, will enable it to improve its reputation. It had been seen as the most volatile in the region and the one most vulnerable to insider dealing. There was also criticism at the high level of cross-ownership of shares in quoted companies.
