The Banking Executive Magazine - August 2024 Issue

Kuwaiti Banking Sector Kuwaiti Banking Sector BENEFITS FROM M&A INCREASE The recent increase in Kuwaiti bank mergers and acquisitions (M&A) is credit positive for the sector, particu- larly as the market is overbanked, Fitch Ratings says. Banks have been increasingly turning to M&A as a strategic response to the limited organic growth opportunities, so as to diversify their business mod- els and to strengthen their financial profiles. Despite Kuwait’s (AA-/Stable) robust fiscal and external balance sheets, the banking sector’s growth potential is impeded by frequent political grid- lock and institutional constraints. Delayed reforms, such as the new Public Debt Law, which requires par- liamentary ratification to allow gov- ernment borrowing, and the mortgage law, which would enable banks to provide residential mort- gages, further exacerbate these chal- lenges. BOUBYAN MERGER PLAN Last month, Boubyan Bank, the sec- ond-largest Islamic bank and the third-largest bank overall in Kuwait, and Gulf Bank, the fifth-largest bank in Kuwait, announced that they were considering a merger. If completed, the merger would create an Islamic bank with assets of about KWD16 billion ($53 billion) and about a 15% market share, measured by consoli- dated assets. Fitch does not expect the transaction to finalise before 2025. In June, Burgan Bank decided to ac- quire a 100% stake in Bahrain’s United Gulf Bank. This followed the sale of 52.2% from its 99.7% stake in Burgan Bank Turkiye to Al Rawabi United Holding Company, and its 51.8% stake in Bank of Baghdad to Jordan Kuwait Bank in 2023. Burgan Bank is aiming to free up capital and focus on GCC business. All these banks are part of Kuwait Projects Company (KIPCO) group, a large and diverse Kuwaiti holding company. In 2023, Gulf Bank and Al Ahli Bank of Kuwait planned a merger that in- cluded converting one of the banks to an Islamic bank. However, the deal was cancelled. In 2022, Kuwait Finance House (KFH) acquired Bahrain-based Ahli United Bank. This increased the bank’s footprint in Bahrain and gave it a presence in Egypt and the UK, as well as a higher market share in Kuwait. KFH also plans to further ex- pand in Saudi Arabia. The expansion beyond Kuwait opened access to broader business and revenue oppor- tunities, compensating for the Kuwaiti market’s limited growth prospects. However, despite this strong appetite for expansion, KFH sold KFH-Bahrain to Al Salam Bank in May 2024 and recently decided to divest from Malaysia. REVENUE GENERATION In 2020, Boubyan Bank acquired a majority stake in the Bank of London and the Middle East to diversify its business model and boost revenue generation. There are ten banks in the Kuwaiti banking sector, all rated by Fitch. Fitch projects modest credit growth of 3%–4% for the sector in 2024 (2023: 2.3%; 1H24: 3.7%) due to high interest rates (the reference rate for lending is 4.25%), modest real GDP growth (-2.1% in 2024; 2.9% in 2025) and political divisions. How- ever, the banks have adequate capi- tal, good funding and liquidity, and strong risk-management practices, which could support faster credit growth if political and institutional hurdles are overcome. ISSUE 188 AUGUST 2024 the BANKING EXECUTIVE 29