Tuesday, May 11, 2010

Commercial Bank of Kuwait - New Board Leadership & Commentary on 1Q10 Results

Two articles in AlQabas for 12 May.
  1. On the Board:  Badr AlAhmad as Chairman and Ali Al Awadhi as Vice Chairman.
  2. On 1Q10 earnings and strategy.
Frankly, both of these stories are hard to believe.

In the first we're told about the election of Badr and Ali with a side note that Mr. Ali AlMoussa (You'll remember him as the hero in the corporate governance charade at  CBK's April OGM) wasn't able to join the Board because the "authorities" (the MOIC and the KSE) are cracking down on standby directors requiring that they hold qualifying shares.  And Brother Ali hadn't bought his.  You'll recall he'd been mooted to take Dherar Al Rabah's place as Chairman.  Wonder if Ali owns any KIB shares?  Dr. Mahdi AlJazzaf, another director, also had to resign. given "other commitments" which necessitated his resignation.  It's unclear if these pre-dated his election.  Or recently developed.  Some how I'm guessing the latter.    It seems that directors' flu is not only quite virulent but also highly contagious.

Anyways to make an unbelievable story short, with AlJazzaf's resignation, another reserve director's no doubt reluctant excuse not to serve (Abdul Rahman Al Ali), and Ali Al Moussa's slip of the mind about buying qualifying shares, it seems the Board has decided to have an OGM for shareholders to elect a new Board.  Shareholders will be asked to submit candidates whose names will be submitted to the Central Bank for approval.  Then the OGM will vote.  

I hope your credulity isn't strained yet, because we haven't yet come to the "tafsir" on the 1Q10 financials.  And there is still some very heavy lifting to be done in the "Believe It or Not" Department.

First some comparative data.  1Q10 Operating Profit was KD22 million versus KD25 a year ago.  In 1Q10, CBK decided to take all Operating Profit to its reserves for loans and investments.  This led to a KD1.4 million loss versus a net profit of KD3.3 million in 1Q09.  CBK's CAR is now 19% versus 18.22% at 31 December 2009.  Expenses are down due to a rigorous expense control program - some 10% from 1Q09.

Explaining the decision, the article (which I suspect is based on a press release) states that this heavy provisioning was done to strengthen the bank's financial condition.  Here one is reminded of Jamie Dimon at JP Morgan Chase and his famous fixation on the "Fortress Balance Sheet".  

All well and good, but it seems to me that it is highly unlikely that a bank would deliberately incur a loss to strengthen its balance sheet since by incurring a loss it was depleting capital.   And preserving capital is a great way to have a strong balance sheet.  Rather I suspect that the Central Bank leaned on CBK to provision a certain amount to deal with known problems.  

Other tidbits from the report are that CBK has hired an international consulting firm to help it with its strategy.  A presentation to the Board elected this month is expected shortly.  Since CBK is likely to have a new board as outlined above, I'm not sure if this makes a whole lot of sense.  Note:  I'm not referring to the strategy but to its presentation.  More on the strategy in the next paragraph.

While the strategy isn't yet finalized, it seems that will be built on a focus on Kuwait.

Kuwaiti banks face a real strategic conundrum.  The Kuwaiti market is relatively small with not much scope for expansion of really productive business - which explains why there is a lot of speculation and  a plethora of bone-headed business ventures.  Some would say that the construction of the Kuwaiti economy actually forces businessmen into this sort of activity because other areas are closed to them.  And no doubt there is a lot of truth to this.  Also there are too many banks fighting over this limited pie. - which leads to all sorts of silly competition.  Another real problem is that what pass for acceptable business practices in Kuwait make the practice of prudent banking difficult.

Perhaps, a kindly paternal figure can help sort out this mess.  Or at least hire better script writers.

Hopefully, some of our readers will comment to expand the story and correct any errors in this post.

4 comments:

Advocatus said...

The press release in English in The Arab Times uses the past tense that the strategy has been presented to the new board that was elected in April. The emphasis on Kuwait is perhaps because too much time/money had been spent in previous years looking at overseas acquisitions that were either too expensive or not a strategic fit. (Yemen anyone?).

You have to remember that "The Family" are big in NBK that does overseas expansion very well. So they are perhaps just stressing the break with the previous management and clarifying that the bank is focussed on Kuwait.

I understand that the bank is trying to manage the NPL impact of its poorly performing credit portfolio (again a legacy of ex CEO and ex Chairman?) by using its own provisions that it had built up from investment gains in earlier years but is being denied by Central Bank.

There often seems no logic to decisions taken by Central Bank but if you look who heads up the supervision department at the regulator you will find an ex employee of Commercial Bank who perhaps left with a chip on his shoulder.

Abu 'Arqala said...

Advocatus

As usual, thanks.

Any thoughts on the recent rumor re Dabdoub? Someone playing in the market? Or is there more.

As to the Family, my impression is that while there is one paramount godfather, the cadet branches are allowed scope for personal business activities. And sometimes there are rivalries. And sometimes erstwhile partners fall out and regroup into new blocs.

H AlEssa said...

Advocatus you are well informed indeed! Since the CB hired the new head of bank supervision (a former CBK employee), almost every one of CBK's quarterly financial statements has come in late (usually barely in time for the KSE's reporting deadline) as the regulator demands amendments to the provisioning CBK originally submitted.

Now is this because he knows where the time bombs are and is being extra cautious, or is it more of a personal issue? Perhaps a combination of both?

Advocatus said...

Seems Personal. I understand that the additional provisions that the bank is required to take are just enough to turn a small profit to a loss with no reason given for how tha additional provision is arrived at.

The financial controller at the bank has noted at investor conferences that the bank could manage its provision requirements over 2009 and 2010 using the operating profit it can generate and its own provisions that it set aside in earlier years.