Banking sector most important in attracting IFI

Performance of Boursa Kuwait for last week was mixed

Northern Economic Region

On Sept 9, 2019 the Kuwaiti Council of Ministers approved the bill of establishing the Northern Economic Region, the basic project in “New Kuwait’s Vision 2035”. We repeat our support for any vision or project that resembles the future, particularly creating adequate sustainable national job opportunities and seeks to achieve a fundamental change in the direction of gradual reduction of the country’s semi-complete dependence on exporting crude oil and creating alternative sustainable income sources. In order not for the bill approval to be the entire achievement and matters run into the opposite direction in reality as in all previous development projects. As in all partial projects within them like education, health services, infrastructure projects and even facilities management like the airport and the port the shortages in any project should be addressed. Examples are numerous, says Al-Shall Weekly Economic Report prepared by Al-Shall Consulting Co headed by Jassem Al-Saadoun.

The above project as we understand it adopts a goal which lacks support in reality. The goal of creating 200 thousand indigenous sustainable jobs with productivity similar to the Singaporean labor’s productivity, which is commendable. However, published materials about the project did not state the means to promote Kuwaiti laborer’s productivity to that level. The promotion basis is the education system, work values and competitiveness for the job in the general work environment all of which are missing in Kuwait. Education is bad and the measurement means is the degree, any degree and some of the degrees are of low quality and even fake. Work values with accumulated veiled unemployment are no more than attendance and leaving routine, with competition in its most part is limited to having the strongest connection or influence.

Another challenge is that the cabinet which approved the above project is also the same cabinet that approved Kuwait Petroleum Corporation’s strategy. While the Northern Project adopts the goal of diversifying income sources away from oil, the Southern Project adopts promoting Kuwait’s oil production to 4 million barrel per day by 2040. Hence, the two projects are under the authority of the same Cabinet though their goals are quite contradictory and compete for the State’s financial resources by $450 billion for each or $900 billion combined. They also compete for tempting the local or the foreign investor and convincing them of the feasibility and attractiveness of each one for them. The country does not endure the two projects’ costs, one of them must be incorrect.

The third challenge is that of the general environment nursing the business. Kuwait is classified within corruption circles; and corruption as well known is very harmful and costly during financial boom. And during resources scarcity, no progress is possible unless fighting corruption is a priority. If we look at the drop in the foreign direct investment inflows during the past five years might be enough to rearm foreigners’ consideration at us as being discouraging on the small enterprises level. Refrainment will be bigger at the mega projects level.

The need remains urgent to change the development approach; the country is losing its options by time. But the inability to manage an airport or a port or traffic or naming streets or Kuwait Bay environment or countering forgery in almost everything requires the public administration to gain trust by countering the above small challenges correctly. If it does, the public will support its approach in countering major challenges.

Foreigners’ Holdings in Boursa Kuwait

We do not have recent figures for foreign holdings in all listed companies on Boursa Kuwait. Therefore, it is okay to adopt a key index for this trading to be published weekly for foreign holdings in Kuwaiti banks issued by Boursa Kuwait and the Central Bank of Kuwait as the source at the end of every working week. We believe that the banking sector is the most important in attracting Indirect Foreign Investment (IFI). We also believe that the analysis of its trading is sufcient to know the behavior of this trading, but caution is required against unpleasant surprises.

The data published about indirect foreign investment behavior in the emerging world exchanges in last August indicated a $14 billion liquefaction movement which then was the outcome of a major correction in the world’s major stock exchanges. The decision to liquefy these investments may come without analysis as foreign portfolios there are automatically liquefied if prices reach a pre-fixed low level where sale begins to cease losses at that level.

Following up figures from Wednesday July 3rd 2019 and Wednesday September 18th 2019, it appears that liquefaction did not reach foreigners’ holdings in the listed banks of Boursa Kuwait.

At the beginning of that period, i.e. on July 3rd 2019, market capitalization of foreigners’ contributions in Kuwaiti banks at the closing prices of that day totaled to KD 1.402 billion. The percentage of that holdings in the banking sector was at 7.78%. Its maximum in absolute market capitalization was at KD 1.489 billion on August 14th 2019, most of which was due to the positive performance of the Boursa Kuwait. Foreigners’ holdings contribution to the entire sector rose slightly to about 8%. On September 18th 2019, the absolute value of the foreigners’ contribution decreased noticeably to about KD 1.311 billion, with nearly 11.9% loss of its value; however, their relative contribution increased slightly to 8.07%, which means that they retained most of their investment at Boursa Kuwait despite the decreasing prices as in the attached graph.

This may mean that their risk assessment on the listed banks in Boursa Kuwait was less than their risk assessment in other emerging stock markets. This was not the local investor’s behavior perhaps due to the fact that the price of Kuwaiti banks against their performance still leaves a comfortable margin. We would like to repeat what we have mentioned earlier that the trading movement according traders to nationality is important information to rationalize the investor’s decision in the Boursa Kuwait. It should include the trading of all listed companies and not only the local banks. It is supposed to be published after the closing of trading each business day, which is an easy matter.

The Monthly Report of the State’s Financial Administration Accounts – August 2019

In its monthly follow-up report for the State’s Financial Administration until August 2019 (as published on its website), the Ministry of Finance indicates that total realized revenues until the end of the fifth month of the current Fiscal Year 20192020/ scored KD 7.359 billion, about 46.5% higher than total estimated revenues for the entire fiscal year in the amount of about KD 15.812 billion.

In details, actual oil revenues until 312019/08/ scored about KD 6.776 billion, i.e. 48.9% of the estimated oil revenues for the entire current fiscal year in the amount of KD 13.863 billion, or about 92.1% of total collected revenues. The average Kuwaiti oil price for the the first five months of the current fiscal year 2019/2020 scored $65.9 per barrel. An amount of KD 583.033 million was collected from non-oil revenues during the same period, a monthly average by KD 116.607 million, while the total estimated amount for the entire current fiscal year was about KD 1.948 billion. This means that the realized amount, if it continues at the same level, will be less for the entire current fiscal year by about KD 549.1 million than the estimated.

Expenditures allocations for the current fiscal year were estimated at about KD 22.5 billion, of which an amount of KD 4.830 billion has been actually spent according to the bulletin until 312019/08. An amount of KD 326 million has been obligated and considered as spent, raising the total expenditures – the actual and the obligated – to KD 5.156 billion. The monthly average expenditure is about KD 1.031 billion.

Though the bulletin concludes that the budget achieved at the end of the 5th month of the current fiscal year a KD 2.203 billion surplus before deducting the 10% of total revenues to the favor of the Future Generations Reserve, we publish it without recommending relying on it. The monthly spending average will increase significantly by the end of the fiscal year. The surplus figure by the end of the fiscal year relies mainly on oil prices and production volume in the remaining 7 months of the fiscal year, with the possibility of turning into a deficit if oil prices continue at the current level, and the increase in actual expenditures over the estimated allocations expenditures in the budget, that was a precedent in the previous fiscal year.

Burgan Bank Financial Results First Half 2019

Burgan Bank announced results of its operations for the first half of the current year which indicate that the bank’s net profit (after tax deductions) was KD 45.58 million, a decrease by KD 5.44 million or by 10.7%, compared to KD 51.02 million in the same period of 2018. The decline in net profits was due to the decrease in total operating income by a higher value than the decrease in total operating expenses. This decline in the net profit occurred despite the decline in total provisions by KD 10.41 million or by 39.2%. Accordingly, operating profit (prior to the deductions of provisions) decreased by KD 16.86 million or by 20%, reaching KD 67.32 million compared with KD 84.17 million.

In details, total operating income decreased by KD 22.84 million or by 16.4%, and scored KD 116.32 million versus KD 139.16 million in the same period of 2018. That resulted from the drop in net interest income item by KD 11.18 million or by 12%, reaching KD 81.95 million versus KD 93.13 million, accompanied by the decrease in all items of the operating income except for item of net investment income that increased by KD 4.71 million.

Total operating expenses decreased by a lesser value than the decrease in the operating income, i.e. by KD 5.98 million or by 10.9%, reaching KD 49.01 million compared with KD 54.99 million, due to the decrease in all items of the operating expenses. Percentage of total operating expenses to total operating income was 42.1%, rising from 39.5%. Total provisions decreased by KD 10.41 million or by 39.2% as mentioned previously, reaching KD 16.15 million compared to KD 26.56 million during the same period last year. Accordingly, net profit margin decreased to 26.6% compared with 27.8% during the same period of 2018.

The financial statements show a decrease by KD 325.9 million or by 4.5% in the bank’s assets, to KD 6.986 billion compared with KD 7.312 billion in the end of 2018. While it increased by KD 76.4 million or by 1.1%, compared with the total assets for the first half of 2018 when it scored KD 6.910 billion. Item of cash & cash equivalents decreased by 34.6% or by KD 403.2 million, to KD 761.1 million (10.9% of total assets) down from KD 1.164 billion (15.9% of total assets) in the end of 2018. It dropped by 11.3% or by KD 96.8 million, compared to KD 857.9 million (12.4% of total assets) in the same period last year. Also, item of loans and advances to customers decreased by KD 63.6 million or by 1.5%, to KD 4.199 billion (60.1% of total assets) compared to KD 4.263 billion (58.3% of total assets) at the end of the year 2018, and decreased by 1% or by KD 44.2 million compared to the same period of 2018 when it scored about KD 4.243 billion (61.4% of the total assets). Total loans and advances to total deposits and balances reached 79.1% compared to 78.1%. While due from banks and other financial institutions item increased by KD 86.8 million or by 14.6%, reaching KD 681 million (9.7% of total assets) compared to KD 594.3 million (8.1% of total assets) in the end of last year. It increased by 218.7 million or by 47.3%, when it scored KD 462.3 million (6.7% of total assets) during the same period last year.

Figures indicate that the bank liabilities (excluding total equities) decreased by KD 320.3 million or by 5%, and scored KD 6.044 billion compared with KD 6.365 billion in the end of 2018. If we compare these with the same period of the previous year we will note a rise by KD 21.5 million or by 0.4%, as total liabilities scored KD 6.023 billion then. Percentage of total liabilities to total assets scored 86.5% compared to 87.2%.

Results of analyzing financial statements calculated on annual basis indicate that all bank’s profitability ratios declined compared with the same period of 2018. The average return on equity ratio of the Bank’s shareholders (ROE) decreased to 11.9% compared with 14.8%. Average return on capital (ROC) declined to 35.6% versus 46.3%. Likewise, the average return on the bank’s assets (ROA) declined to 1.3% versus 1.4%. Earnings per share (EPS) dropped to 15 fils compared to 18.9 fils. (P/E) scored 11.7 times compared to 7 times due to the decline in the EPS by 20.6% against an increase in the share market price by 32.1%. (P/B) scored 0.98 times compared to 0.68 times in the same period of 2018.

The Weekly Performance of Boursa Kuwait

The performance of Boursa Kuwait for last week was mixed compared to the previous one. Where the traded value, traded volume and number of transactions increased, while the general index (AlShall index) decreased. AlShall Index (value weighted) closed at 481.4 points as of last Thursday, showing a decrease by 16.8 points or by 3.4% compared with its level last week. While it remained higher by 52.4 points or by 12.2% compared with the end of 2018.