Strengthening Kuwait’s capital markets presence in regional banking and investment

Two major transactions were under way in Kuwait’s financial sector in mid-2019. First, KAMCO Investment Company, the investment banking subsidiary of Kuwaiti conglomerate KIPCO, was merging with Global Investment House (GIH), another local investment firm. Second, Kuwait Finance House (KFH), the country’s largest Islamic bank, was looking to purchase Ahli United Bank (AUB) of Bahrain for around $8bn.

Making Moves

The joining of KAMCO and GIH is the largest merger in Kuwait’s investment sector and follows the 70% stake in GIH that KAMCO acquired in September 2018. A memorandum of understanding was signed in March 2019 to begin the regulatory process for the merger. The combined entity will be the largest asset management and investment banking business in Kuwait, and one of the largest in the MENA region, with $13bn of assets under management and a presence in Kuwait, Saudi Arabia, the UAE, Egypt, Bahrain, Jordan and Turkey. The aim of the merger is to create a regional investment banking powerhouse with a broad range of products that is likely to expand over time. There is room for an investment bank from the region, as the Kuwaiti market is currently dominated by international banks leveraging their scale and global networks. It is hoped that the KAMCO-GIH entity will be able to fully support public and private sector development plans, and utilise its regional partnerships and know-how to compete with international rivals.

Banking sectors in the GCC are ripe for consolidation; the region is known for having a large number of banks relative to the size of its populations. Mergers would greatly enhance the ability of these entities to compete internationally, as well as the capacity to finance some major projects planned in the region, particularly in the energy sector. The operating environment for banks has been tough in Kuwait in recent years, and while this would ordinarily encourage consolidation, not much has occurred on this front. A recently improved operating environment and regulatory concerns about oligopolistic powers are likely to prevent any mergers in the short term (see Banking chapter). Therefore, some of the larger Kuwaiti banks are looking overseas for expansion opportunities. This thinking is likely behind KFH’s acquisition of Bahraini lender AUB, which, if completed, would be the first major regional bank merger in the GCC in recent years. A preliminary deal was reached in January 2019 and due diligence was completed in early September that year. The merger would create the sixth-largest bank in the GCC and one of the world’s largest Islamic banks, with total assets of about $92bn.

Future Activity

Reforms in Kuwait could drive further mergers and acquisitions (M&A). Foreign ownership limits have been raised in the banking sector, and the economy and capital markets are being opened to international investors. Indeed, Kuwait had the second-most M&A activity in the GCC between 2014 and 2018, with the number of transactions totalling 127 over the period, according to the Kuwait Financial Centre in February 2019. When foreign ownership restrictions were removed from Kuwait’s telecoms sector in 2015, it quickly became foreign owned, and some market watchers believe the banking sector could follow the same path. However, foreign entrants would still be subject to approval from the central bank, in an effort to prevent a takeover of the banking sector.

Looking ahead, the development of capital markets across the region is likely to encourage more firms to list, creating additional potential targets for M&A and ensuring Kuwait remains an attractive place for such transactions. Further consolidation among investment companies is likely due to their high quantity and as the outlook for some of them improves. Banking sector consolidation is less likely in the near term, however, due to regulatory obstacles and the reluctance of bank shareholders to sell. Large Kuwaiti banks may seek additional acquisitions of foreign banks, though, as the performance and capitalisation of these local entities improve and they look overseas for quicker expansion.