Remote assets: Revenues from a handful of far-flung markets are on the rise

In recent years, Kuwait-based banks have faced a number of challenges, including a conservative regulatory environment and relatively slow economic expansion since the international financial downturn. With this in mind, and in an effort to shore up long-term growth prospects, many local financial institutions have invested heavily in international markets over the past few years. “A number of banks have been expanding internationally,” said Hamad Ali Al Hasawi, the secretary general of the Kuwait Banking Association, an industry organisation. “We have players operating in Turkey, in Egypt and, of course, in East Asia as well.”

AN OPPORTUNE MOMENT: In the wake of the global downturn, many Kuwait-based banks have struggled to find reliable sources for new revenues. Demand for loans has remained down throughout the region (see analysis), activity at the Kuwait Stock Exchange is at historical lows (see Capital Markets chapter) and the local regulatory regime makes for a challenging operating environment at home. “The operational environment is challenging,” said Eduardo Eguren, the CEO of Burgan Bank, the fourth-largest local bank by capitalisation. “I recognise that more rules and limitations may mitigate some risks, but they also put us at a disadvantage compared to banks in more developed markets that have greater freedom. We need to achieve a balance.” As a result of heavy provisioning in the years immediately following the crisis, by 2011 a considerable number of Kuwait-based banks were sitting on substantial amounts of liquidity. With few investment opportunities at home, many local players found themselves uniquely well positioned to invest in foreign markets.

RECENT ACTIVITY: Burgan Bank, a subsidiary of the international investment firm Kuwait Projects Company, has been one of the country’s most active players in terms of foreign acquisitions. In late December 2012 Burgan completed an acquisition of 99.3% of Eurobank Tekfen, an Istanbul-based bank that was previously owned by Eurobank Ergasias, a Greek lender. The $349m deal included a loan portfolio worth around $135.4m in total. Burgan carried out the acquisition of the first tranche of the bank earlier in the year. Less than a week after the December 2012 sale was finalised, Burgan completed a KD100m ($357.16m) bond issuance – the largest dinar-denominated bond in Kuwait’s history – in an effort to replenish its capital base.

GLOBAL PRESENCE: Most of Kuwait’s leading local banks have been active in foreign markets for years. Indeed, National Bank of Kuwait (NBK) first set up shop outside Kuwait in 1983, when it opened a branch in London. In subsequent years the institution established branches, acquired subsidiaries or negotiated operating agreements in a wide variety of markets around the world. During the market boom in the early and mid2000s NBK acquired a substantial number of international assets. Since the downturn, however, the institution has slowed its foreign expansion efforts to focus on provisioning and domestic operations. In 2012 some 19% of NBK’s operating income came from outside Kuwait, down from around 22% in 2010. In early 2013 the institution announced it was in the early stages of setting up a new Islamic bank in Switzerland, and it was considering expanding into North Africa and Syria.

Kuwait Finance House (KFH), the country’s second-largest bank by assets, has also had a major international presence since the 1980s. In 2011, the most recent year for which data was available, some 45% of the bank’s total revenues came from outside Kuwait. Since the downturn KFH has dedicated a substantial amount of income to provisioning as part of a corporate restructuring effort. At the same time, the firm has been making a handful of targeted real estate acquisitions and other investments. In December 2011, for example, KFH paid $32.5m for a residential apartment complex in Canada in the initial phase of a long-term joint venture with Killam Properties, a Canadian real estate firm. Then in March 2013 KFH offered to put up a $3bn subscription for a planned sovereign sukuk (Islamic bond) to be issued by the government of Egypt.