Call for retirement fund as oil age wanes
Boursa Kuwait performance during week mixed
Investments in “AREVA”
The French Government offered to buy “Areva” shares from the minority owners and granted two weeks from August 1 to August 14, 2017 to do that. It offered 4.5 euros per share which is 13.85% of the buying price. The Kuwait Investment Authority (KIA) sold its share (4.82%), 18.46 million shares, and received 83 million euros in return, less by 517 million euros compared to purchase price at 600 million euros with estimated 86% loss. We deliberately delayed commenting on the deal for two main justifications. The first one mentioned by the Authority, which is correct, is that the accounting should be on the basis of the total performance of the entire investments of the sovereign fund, i.e. in one financial year, and not on the basis of investment performance within it. The second is that Kuwait is currently at crossroads and should start with a fundamental change to its investments function. Therefore, our purpose here is not to raise debate about the deal but to use “Areva” investment as a prelude to call for a fundamental required change in the function of the Future General Fund by transforming it into a retirement fund after indicators of the oil age starting its retirement, says AlShall Economic Report prepared by Al-Shall Consulting Co headed by Jassem Al-Saadoun.
Investment in “Areva” occurred at the beginning of the major prosperity for the oil market after 2008 crisis. It also came at a time with an inclination towards using the atomic energy and after the advice of an international consultant. The purchase was by a price less than that appraised by that consultant at 325 euros per share (365 euros estimated by the consultant) before splitting the one share into 10 shares. Therefore, it is assumed that the KIA did what should have done to make an investment decision. Nevertheless, the decision was not clean from sins. The decision came to buy part of the German “Siemens” Company share (34%) in “Areva.” Areva employs 3,600 German professionals. All atomic industry in Germany is with Siemens. Nevertheless, the complaint of the strong partner “Siemens” came as a result of its boredom from the dominance of the French Government partner on the decision- making power. The complaint and incompetence of a partner of such magnitude and with this benefit from the partnership make replacing it with minority shareholders, the biggest being Kuwait with 4.82%, meaningless to the new shareholders. The decision came after “Areva” purchased a uranium company listed on Toronto stock market — Canada — in 2007 when uranium prices were at US$ 135 while the prices was at US$ 42 when Kuwait purchased the shares. “Areva” was suffering from its investment in that company from uranium prices and its reserves volume by the end of 2010, the deal time. Besides, there was general information about an arbitration case filed in 2008 against the company together with “Siemens” for compensating by 3.5 billion euros due to encountered problems in building a reactor in Finland. The purchase deal was signed on December 28, 2010. It could have been better to wait until “Areva’s” financial statements had been published after the end of the year when its financial problems would have emerged together with its investment allocations in the uranium company. Knowing the financial position of the company could have been adequate enough to cancel the purchase resolution. Finally, and under all circumstances Kuwait would have not benefited neither from technological partnership nor from job opportunities. In addition, the big risk could not justify the probable investment financial return.
Again, the basis of accusing any investment entity should be the total average of its investments’ performance, and not on the basis of one deal. This deal was misfortunate. In 2011, “Fukushima” catastrophe occurred in the careful Japan and not in “Chernobyl” in Russia, which caused an extensive deterioration in that industry. In addition, Kuwait may have been exposed to a trick or deliberate concealment of vital information about the company by the company management and the French Government, its main owner.
However, oil market conditions are no longer the same as in the beginning of the current decade and will get worse in the next decade. The function of the future generations is no longer supportive of the financial conditions, but the main function is to finance the public finance at least to help Kuwait succeed in creating economy that finances itself from taxes on its activities.
The Kuwait Investment Authority announced achieving a general average return by 5.1% on its investments in the past four fiscal years. We believe it is close to our proposed target at 6% so that the revenue becomes the sustainable main
financing source of about 60% of the budget expenditures on the basis of which the transform in the concept of sustainable public finance is built. Changing the investment function makes the measurement unit and judging any investment in par with its significant role in realizing the total goal for the total fund’s investments. Then, investment will not be in any available field and standards become unified for judging the resolution, either rewarding or penalizing.
Profits of Listed Companies – First Half 2017
The number of listed companies which officially announced results of their operations for the first half was 153 companies, about 95% of the 161 listed companies, after excluding the suspended companies, the companies which moved from the official market to the parallel market, and those with varying fiscal years. Net profits of those companies scored KD 1.017 billion, increased by 15.8% from profits of the same companies in the first half of 2016 which scored KD 878 million.
When we compare profits of the second quarter of the current year, with profits of the same sample in the first quarter, which scored KD 447.9 million, we note it dropped by -11.3%. 8 sectors out of 12 active sectors increased their profits, if compared with its performance in the first half of 2016. The best was financial services sector which increased its profits from KD 38.5 million to KD 127 million, or by 230.1%. The banks sector came second and increased its profits from KD 450.2 million to KD 480 million, or by 6.6%. The industrial sector came third which increased its profits from KD 104.5 million to KD 118.9 million, or by 13.8%. While profits of the consumer service sector retreated from about KD 25.5 million to KD 18.2 million, or by -28.6%.
Details of the sectors performance are summarized in the attached table.
Results of the first half of the current year indicate improvement in the performance of 98 companies, including 72 companies with increased profits and 26 companies reduced their losses or turned into profitability. This means that 64.1% of the companies which announced their results achieved better performance. 55 companies achieved drop in their performance including 39 companies whose profit level dropped, while 16 companies increased their losses or moved from profits into losses. The top gainers list contained 10 leading companies achieved profits value by KD 605.4 million, or by 59.5% of total absolute profits, led by “NBK” with about KD 164.7 million. “Ahli United Bank” -Bahrain- came second by KD 94.8 million. “Zain” came third in profits by KD 82.3 million. On the contrary, ten companies achieved the highest absolute losses by a total of KD 16.7 million and “IFA Hotels and Resorts Co.” scored the highest losses by KD 2.84 million and the “Ithmar Holding Co.” came second in losses by about KD 2.80 million.
Monetary & Economic Indicators (January – March 2017)
The Periodical Quarterly Statistical Bulletin of the Central Bank of Kuwait (January- March 2017) published on its website provides some economic and monetary indicators whose developments worth following up and documentation. For instance, total population in Kuwait in the end of the first quarter of 2017 scored 4.415 million, which is only 4,000 people more than the figure in the end of 2016. This means that the average of quarterly growth rate of people reached 0.09%, or 0.36% per year. We believe that there is error in the figures unless reverse migration has occurred whose justifications have been missed.
The bulletin indicates that balance of trade — commodity exports minus commodity imports — achieved surplus in the first quarter of 2017 in the amount of KD 1.625 billion, a drop by — 4% from the surplus of the fourth quarter of 2016. Kuwait’s exports during this quarter scored about KD 4.165 billion, 89.2% of which were oil exports. Value of commodity imports in Kuwait — excluding the military — scored about KD 2.539 billion.
Kuwait achieved KD 392 million surplus in the first quarter of last year, KD 1.202 billion in the second quarter, KD 1.385 billion in the third quarter and KD 1.693 billion in the fourth quarter due to the rise in oil prices. This means that balance of trade in 2016 achieved surplus in the amount of KD 4.672 billion of which 89.6% were oil exports. This is -32.9% lower than its value in the counterpart period of 2015 in the amount of KD 6.964 billion. Imports value in 2016 scored KD 9.304 billion. Current year surplus is expected to score KD 6.5 billion if the first quarter surplus recurs and oil price remains around US$ 50 per barrel. Therefore, trade surplus rise would be between 40% and 50%.
Consumers’ price index during the first quarter achieved positive growth by about 0.6%. Their average scored 144.3 (2007=100) rising from an average of 143.5 in the fourth quarter of last year which is tolerable. This growth is attributable to the dominance of the impact of rising housing services prices from an average of 148.2 to an average of 150.4 (+1.5%).
The bulletin indicates drop in the weighted interest rates of balances on deposits from 1.643% in the fourth quarter of 2016 to 1.632% in the first quarter of this year, a quarterly drop rate by -0.67%. The weighted interest rates of balances on loans continued its rise from 4.509% to 4.583%, for the same period, 1.6% quarterly growth rate.
Volume of private sector deposits at local banks scored about KD 35.058 billion (KD 34.133 billion in the end of 2016), a 2.7% quarterly growth rate. On the other hand, local banks claims on private sectors increased to KD 36.922 billion up from KD 36.021 billion in the end of 2016, achieving 2.5% quarterly growth rate.
Kuwait International Bank (KIB) Financial Results — First Half 2017
Kuwait International Bank (KIB) announced results of its operations for the first half of the current year which indicate the bank achieved net profits — after tax deductions — scored about KD 11 million, dropped by KD 1 million, or by 8.5% drop vis-à-vis KD 12 million for the same period in 2016. This decrease in net profits is due to a drop in total operational incomes versus rise in total expenses. Therefore, the bank’s operational profit dropped by KD 2.2 million and scored about KD 15.4 million vis-à-vis KD 17.6 million.
In details, the bank’s total operational incomes dropped by KD 743 thousand, or by 2.4%, and scored KD 30.7 million, compared with KD 31.4 million for the same period in 2016. This resulting the drop in the item of net financing incomes by KD 1.1 million, and scored KD 23 million (representing 75% of total operational incomes) versus KD 24.1 million (about 76.7% of the total). Item of other incomes decreased by about KD 868 thousand and scored KD 155 thousand compared with KD 1 million. While item of investment incomes rose by KD 1.2 million and scored KD 2.5 million versus KD 1.3 million.
Total operational expenses rose by KD 1.4 million, or by 10.1%, and scored KD 15.3 million, compared with KD 13.9 million in the same period of 2016, due to the rise in most items of operational expenses by KD 1.5 million and scored KD 14.4 million compared with KD 12.9 million. While item of depreciation dropped by 12.3%. Total provisions and impairment losses dropped by KD 1.1 million, or by 21.7%, and scored KD 4 million, compared with KD 5 million. This explains the drop in the net profit margin that scored 35.8% compared with 38.2% in the same period of 2016.
The bank’s financial statements indicate that the bank’s total assets increased by KD 51.8 million, or by 2.8%, and scored KD 1.898 billion, compared with KD 1.846 billion in the end of 2016. It however increased by KD 69.9 million, or by 3.8%, if compared with the same period of 2016, when it scored KD 1.828 billion. Item of financing receivables rose by KD 60.9 million, or by 4.8%, and scored KD 1.329 billion (70% of total assets), versus KD 1.268 billion (68.7% of total assets) in the end of 2016. It rose by 9.9%, or by KD 120.2 million, and scored KD 1.209 billion (66.2% of total assets), in the same period of 2016. Percentage of financing receivables to total deposits scored 83.6% compared with 78.5%. While item of dues from banks dropped by KD 5.9 million, or by 1.5%, and scored KD 387.4 million (20.4% of total assets) versus KD 393.3 million (21.3% of total assets) in the end of 2016. It however dropped by 11.8%, or by KD 51.8 million, compared with the same period in 2016, and scored KD 439.3 million (24% of total assets).
Figures indicate that the bank’s liabilities (without calculating total equity) increased by KD 49.7 million, or by 3.1%, and scored KD 1.641 billion versus KD 1.591 billion in the end of 2016. It rose by KD 61.7 million, or by 3.9%, compared with the total in the first half of last year. Percentage of total liabilities to total assets scored 86.5% compared with 86.4%.
Results of analyzing the bank’s financial statements calculated on annual basis indicates that all bank financial indexes dropped compared with the same period of 2016. Average return on equities relevant to bank share holders (ROE) dropped to 8.7% compared with 9.8%. Likewise, the average return on capital (ROC) dropped to 21.1% compared with 23.1%. Average return on assets (ROA) also dropped to 1.2% compared with 1.3%. EPS decreased to 11.7 fils versus 12.8 fils. (P/E) scored 10.4 times versus 7.1 times, as a result of increased market price share by 34.1% versus a drop in EPS below its level in the end of June 2016, by 8.9%. (P/B) scored about 1 time compared with 0.8 times in the same period last year.
The Weekly Performance of Boursa Kuwait
The performance of Boursa Kuwait for last week was mixed compared to the previous one, where the traded volume index, the number of transactions index, and the general index showed an increase, while the traded value index decreased, AlShall Index (value weighted) closed at 416.9 points at the closing of last Thursday, showing an increase of about 6.4 points or about 1.6% compared with its level last week and it increased by 53.9 points or about 14.8% compared with the end of 2016.