THE KUWAIT BANKING SECTOR: 2009 PRIMER

UNCLAS SECTION 01 OF 03 KUWAIT 000982

SENSITIVE
SIPDIS

STATE FOR NEA/ARP, EED/IFD/OMA
STATE PASS FEDERAL RESERVE
TREASURY FOR IA

E.O. 12958: N/A
TAGS: EFIN EINV ECON KU
SUBJECT: THE KUWAIT BANKING SECTOR: 2009 PRIMER

REF:

A. 08 KUWAIT 1155

B. 08 KUWAIT 1123

C. 09 KUWAIT 853

D. 09 KUWAIT 619

E. 09 KUWAIT 599

F. 08 KUWAIT 1183


1. (SBU) Summary: Kuwait's banking sector, the third largest in the
GCC after Saudi Arabia and the United Arab Emirates, comprises 18
financial institutions, including market leaders National Bank of
Kuwait (NBK),and Kuwait Finance House (KFH),the second largest
Islamic bank in the world. With the notable exception of Gulf Bank
-- which required GOK intervention and a major recapitalization in
late 2008 following currency trading losses -- Kuwait's banks have
weathered the global financial crisis. This cable outlines the
banking sector as a whole, and describes the major players within
each of the two main sub-sectors: commercial banking and Islamic
banking. End Summary.


2. (U) The banking sector of Kuwait is one of the largest in the
Gulf region, with total banking assets amounting to KD 39.1 billion
or USD 136.4 billion (as of August 2009),according to the Central
Bank of Kuwait. The banking sector comprises 18 banks: six
conventional (commercial) banks, three Islamic banks, eight branches
of foreign banks and one specialized bank. The six commercial banks
include market leader National Bank of Kuwait (NBK),Commercial Bank
of Kuwait (CBK),Gulf Bank, Al-Ahli Bank of Kuwait, the Bank of
Kuwait and the Middle East (BKME) and Burgan Bank. BKME received
permission from the Central Bank to convert to an Islamic bank, a
process that is expected to be completed in 2010. The three
Sharia-compliant banks are currently Kuwait Finance House (KFH),the
clear market leader in Islamic banking, Boubyan Bank, and Kuwait
International Bank (KIB, formerly Kuwait Real Estate Bank, which
converted to an Islamic bank in mid-2008). On September 15,
Kuwait's cabinet issued a decree forming Warba Bank, which will
become the newest Islamic bank in the country. KIB's conversion
leaves one remaining specialized bank, the Industrial Bank of
Kuwait.


3. (U) The Central Bank has granted licenses to 10 foreign banks
thus far, eight of which have active operations in Kuwait. BNP
Paribas and HSBC began operations in 2005, Citibank and the National
Bank of Abu Dhabi opened in 2006, Qatar National Bank commenced
operations in 2007, and Doha Bank opened its office in 2008.
Dubai-based Mashreq Bank began operations in mid-2009 and the Bank
of Muscat and Riyadh-based Al Rajhi Bank (the largest Islamic bank
in the world) are both expected to open branches in Kuwait in 2010.
The Bank of Bahrain and Kuwait (BBK) has operated in Kuwait since

1977. Foreign-owned banks' branches are not allowed to compete in
the retail banking sector and are confined to one branch office in
Kuwait.


4. (SBU) Total assets of Kuwaiti banks stood at KD 39.1 billion (USD
136.4 billion) as of August 2009, compared with KD 38.7 billion (USD
135.1 billion) for August 2008 and KD 32.1 billion (USD 112.0
billion) for August 2007. Kuwaiti banks' aggregate profit for the
first six months of 2009 amounted to KD 223.9 million (USD 781.5
million),compared to KD 634.2 million (USD 2.2 billion) for the
first six months of 2008. Unsurprisingly, most banks experienced a
significant decline in profits during this period, as Kuwait's stock
and property markets dropped sharply and lending growth decelerated.
Gulf Bank, which was hit by currency trading losses totaling more
than USD 1.4 billion in late 2008, was the only large Kuwaiti bank
to record a net loss in the first half of 2009.

Top Three Commercial (Non-Islamic) Banks
--------------


5. (SBU) National Bank of Kuwait (NBK): Kuwait's preeminent bank,
NBK, was established in 1952 by a consortium of Kuwaiti merchant
families and was the first indigenous bank in Kuwait and the wider
Gulf region. With total assets of KD 11.6 billion (USD 43.4
billion) as of December 2008, NBK is ranked among the top 300 banks
in the world and is the only bank in the Arab world to be named in
Global Finance magazine's "50 safest banks" rankings for 2009. NBK
has the widest branch network of any financial institution in the
Middle East, with 155 branches worldwide including 69 in Kuwait.
The bank enjoys an A+ credit rating from Standard & Poor's (S&P) and
is believed to have minimal exposure (approximately USD 10 million)
to the troubled Al-Gosaibi and Saad groups in Saudi Arabia. The
bank's major shareholders include some of the same Kuwaiti merchant
families party to the bank's establishment, including the Al-Bahar,
Al-Sayer, Al-Sager, Al-Kharafi, Al-Fulaij and Al-Hamad families.
NBK's chief is Ibrahim Dabdoub, a highly respected Palestinian
banker who joined the firm in 1961 and has served as CEO since 1983.

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NBK's management is NOW seeking to compete with KFH in the Islamic
banking sphere -- in recent weeks the bank has purchased large
stakes in Shariah-compliant Boubyan Bank from the Kuwait Investment
Authority (KIA) and other investors, bringing NBK's ownership of
Boubyan to 40%. NBK spokesmen have made clear the bank's intention
to become the majority owner of Boubyan Bank, currently Kuwait's
second largest Islamic Bank.


6. (SBU) Gulf Bank: Kuwait's third largest bank by assets (KD 4.9
billion or USD 18.4 billion),Gulf Bank was, until recently, hailed
as the country's fastest growing bank. However, the bank's
reputation suffered following the October 2008 disclosure of
currency trading losses exceeding USD 1.4 billion and the subsequent
efforts to shore up the firm's capital base and appoint a new board
of directors; KIA took a 16% stake in the bank as part of a USD 1.4
billion recapitalization (refs A and B). Media and other sources
suggest that Gulf Bank may also face significant exposure to the
ailing Saad and Al-Gosaibi groups in Saudi Arabia. While the bank
has declined to reveal the extent of such exposure, sources in the
financial community assert that the figure is approximately USD 400
million to USD 500 million. Gulf Bank's S&P rating is currently
BBB+. In addition to the KIA, the bank's other major shareholder is
the Alghanim family. (Note: Kutayba Alghanim replaced his estranged
brother, Bassem, as chairman of the board of the directors following
the October 2008 losses, before handing over to Ali Al-Rashaid
Al-Bader, a respected former KIA chief. Kutayba's son, Omar, the
CEO of Alghanim Industries, NOW represents the family on the board
of directors. End Note). Gulf Bank's CEO is Michel Accad, a
Lebanese national, who replaced American Louis Myers in April 2009.


7. (SBU) Commercial Bank of Kuwait (CBK): One of Kuwait's big four
retail banks, CBK (also known as Tijari) was established by Amiri
Decree in 1960 and NOW operates 53 branches in Kuwait. CBK has
assets of approximately KD 4.3 billion (USD 16 billion) and posted a
modest profit for the first six months of 2009. The bank's S&P
credit rating is A-. Investment vehicles controlled by the ruling
Al-Sabah family own approximately 23% of CBK. The bank's chairman,
AbdulMajeed Al-Shatti, was chairman of the GOK's ad hoc committee on
dealing with the effects of the global financial crisis, which
convened intermittently in late 2008 and early 2009.

Islamic Banks: One Plus Two
--------------


8. (SBU) Kuwait Finance House (KFH): Established in 1977, KFH is one
of the world's preeminent Islamic banks and the second largest bank
in Kuwait. KFH owns banks in several Middle East and Southeast
Asian countries and is one of the biggest retail banks in Turkey
(Kuveyt T|rk Bank),Bahrain and Malaysia. The bank has won several
accolades as Best Islamic Bank in the world from publications such
as EuroMoney. KFH operates 47 branches and claims to hold 25% of
all deposits in Kuwait. Its assets stood at KD 10.5 billion (or USD
39.3 billion) in December 2008, lagging market leader NBK by KD 1.1
billion (or USD 4.1 billion). KFH's S&P rating is A-. The bank's
largest shareholders are GOK entities, namely the KIA (24%),the
Public Authority for Minors Affairs (10%) and the Awqaf Public
Foundation (8%). KFH's chairman and managing director is Bader
Abdul Muhsen Al-Mukhaizeem.


9. (SBU) Boubyan Bank: Founded in 2004, Boubyan operates 14 branches
in Kuwait and has assets of approximately KD 840.5 million or USD
2.9 billion (about one-thirteenth the size of those of KFH). The
bank has become the vehicle through which NBK hopes to build up its
own Islamic banking capabilities. As noted above, NBK has
aggressively increased its ownership in Boubyan in recent weeks,
bringing its ownership stake to 40%, and declared its intention to
become the bank's majority shareholder. Boubyan is not rated by
S&P.


10. (SBU) Kuwait International Bank (KIB): The former Kuwait Real
Estate Bank, incorporated in 1973, formally converted to an Islamic
bank in 2007 and has nine branches in Kuwait. The bank's assets
stand at KD 1.08 billion (or USD 4.0 billion). KIB posted a modest
loss for the first six months of 2009 and is expected to post a loss
for the third quarter too, given exposure to the ailing Dar
Investment firm. The bank's largest shareholders are the Al-Sabah
controlled Kuwait Projects Company (KIPCO) (8%) and Matrook Trading
& Contracting Co. (7%). The bank's General Manager for the past two
years has been Adil Ahmed, a Pakistani-Australian banker, who is
stepping down this month. KIB's efforts to recruit a successor for
Ahmed reportedly have been stymied by the Central Bank, which has
rejected two candidates, allegedly because they lack Islamic banking
experience. KIB is not rated by S&P.


11. (SBU) In September 2009, the GOK announced the establishment of
a fourth Islamic bank in Kuwait, Warba Bank. 76% of the new bank's

KUWAIT 00000982 003 OF 003


shares will be held by Kuwait's more than one million citizens --
who will be allocated the shares free of charge -- and the remaining
24% will be owned by the KIA. Post's sources indicate that the bank
will not commence operations until 2010 or even 2011 (septel).

Regulatory Environment
--------------


12. (SBU) The Central Bank of Kuwait, operating largely under Law 32
of 1968, has responsibility for regulating the banking sector,
including, as of 2003, all Islamic banks. Under the 23-year
leadership of Governor Shaykh Salem AbdulAziz Al-Sabah, the Central
Bank has been a generally conservative banking supervisor with high
general and extraordinary provisions for non-performing loans and a
required "risk based" capital adequacy ratio of 12%. The major
losses at Gulf Bank, however, as well as losses at Kuwait's
investment companies (which are regulated by the Central Bank, but
as non-deposit taking institutions have not received the same level
of scrutiny) have demonstrated the need to improve banking
supervision to deal with financial innovation. The Central Bank's
remit does not formally extend to the Kuwait Stock Exchange (KSE) --
the Arab's world's second largest bourse -- and the lack of a
capital markets authority continues to undermine foreign investors'
confidence in the transparency and efficiency of Kuwait's financial
markets. All of Kuwait's locally-owned banks are traded on the KSE.
The GOK's Ministry of Commerce and Industry produced draft
legislation for a capital markets authority in late 2007; the law
has been discussed and edited several times by the National
Assembly's economic and financial committee since that time, though
there are no plans for a floor debate in the near future.

Banking Outlook
--------------


13. (SBU) Although profits are down and reportedly non-performing
loans are up, Kuwait's banks have weathered the effects of the
global financial crisis relatively well. Even Gulf Bank, its
reputation tarnished and facing further book losses relating to the
Al-Gosaibi and Saad groups' woes, is sufficiently capitalized to
ride out likely operating losses for 2009. Contributing to the
relative stability of the sector is the generally conservative and
risk-adverse approach of Kuwaiti banks' boards of directors and
executives. The conservatively-run KIA's large stakes in several
banks is also seen as a brake on risk-taking. The Central Bank has
promoted stability by ensuring adequate liquidity in the banking
system and keeping bank chiefs' on a short leash with respect to
risky investments and trading.


14. (SBU) However, Kuwait's banks are not out of the woods yet. In
addition to possible exposure to the Al-Gosaibi and Saad groups,
some of Kuwait's banks -- including CBK and Gulf Bank -- face
exposure to Kuwait's troubled investment sector. Some of Kuwait's
largest investment firms, including giants Global Investment House
and Dar Investment have defaulted on multi-billion dollar
obligations and continue to negotiate restructuring and standstill
agreements with creditors (see refs C, D, E and F for further
information). Additionally, lingering weaknesses in the local real
estate market and Kuwait's underperforming stock market could also
hurt Kuwaiti banks' balance sheets in the coming months. Post will
continue to monitor and report on Kuwaiti banks' exposure to ailing
investment companies.

JONES
1