Speculation over Effectiveness of Proposed Government Investment in Kuwaiti Banks

August 23, 2010

The banks of Kuwait, which have seen more losses than those in other countries in the Arabian region of western Asia, are reporting an increase in potential buyers.  This comes as a result of the Kuwaiti government recently announcing their plan to encourage local investors to put $104.2 billion into the financial market.

Analysts are still cautioning investors over acquiring Kuwaiti banks, due to doubts over whether the government plan will actually occur, in addition to a current trend of their bank stocks trading at high multiple levels of their previous stock values.

The Kuwaiti government’s plan, guaranteed by the state, is intended to produce new construction of ports & cities, as well as increased investment in the oil & natural gas production industry.  The government intends to provide 50% of the funding, with the other half coming from private investment.

The plan is viewed by analysts as a delayed response by Kuwait to reduce their dependence upon oil for national revenue, by encouraging banks to increase loaning.

The country’s biggest lending institution, the National Bank of Kuwait (NBK), is currently trading at a 34% increase in value for 2010.  The average increase in profits for all of Kuwait’s banks is currently at 5.3% over last year.

The government plan is expected to benefit banks with large balance sheets, like NBK, as well as other banking institutions trading at lower multiples of their previous stock values.  One of the expectations of the plan is for a higher quality of borrowing companies in the banking sector.

Kuwaiti banking institutions such as NBK, the Kuwait Finance House, and Boubyan Bank, which experienced losses in the recent financial turmoil, have declared rights issues in an effort to increase their capital.  These secondary market offerings to existing shareholders grant the ability to buy a specific number of new shares at a guaranteed price within a certain time period.

Analysts are speculative of when the government plan would actually inject capital into the Kuwaiti economy.  Kuwait has been slower than its neighbors in putting their oil profits into development projects, mainly due to disputes between the parliament and the government.

Although a lack of disclosure is present in all of the Gulf Arab countries’ stock markets, Kuwait is particularly guilty, with a lack of official announcements and random, unexpected changes in stock prices due to back-room deals.  Due to this lack of transparency, many foreign investment firms have avoided participation in Kuwait’s economy.

The current price-to-earnings ratio of the Kuwait Finance House is the highest in Kuwait, at a level of 23.  Al Ahli Bank’s ratio is at 16.1, with the National Bank of Kuwait at 14.9, according to data from Reuters.  The Arab region’s biggest listed lender, Al Rajhi Bank of Saudi Arabia, has a price-to-earnings ratio of 17.1, with Qatar National Bank evaluated at 11.2.

Most analysts suggest that watching NBK is essential in evaluating the success of the future plan, since it is predicted to be the first in achieving benefits from the proposed measure.