Wednesday, July 21, 2010

What Were They Thinking?: Central Bank of Kuwait Approves Burgan Bank Share Buyback

When I read announcements like the one below (that the CBK has given permission to Burgan Bank to buy back or sell up to 10% of its shares) or the periodic announcements on the UAE exchanges reporting this or that bank's share buyback activity, I've got to wonder "what were they thinking"?  Or maybe "were they thinking at all?"  To be clear, here I'm not just questioning what the bank itself is thinking so much as what its apparently overly friendly or somnolent regulator is.

Those not suffering from banker's ADD will recall that Burgan Bank had a massive rights issue earlier this year -  April to be specific.  360 million shares.  Equivalent to a 34.57% increase in capital.  A Rights Offering that needed two stages because in the first Burgan managed to only place 85% of the amount.   If you have a banker's memory and don't remember, here's the link.

While one can never be certain, presumably Burgan raised this massive amount of capital because it needed it.   Perhaps, it was even encouraged by the Central Bank to do so.  To now partially decapitalize the bank seems not to make much sense though I suppose I could have missed the miraculous turnaround in the Kuwaiti economy in the last three months.  The boom in the KSE. The restoration of imagined ruddy health to the investment firm sector.  The disappearance of problem loans.

Looking southward,  one might also expect that the Central Bank of the UAE would stop or reduce sharebuybacks by local banks on the theory that in these difficult times banks need all the capital they can muster to provide a buffer against  problems. Though again I suppose difficult times may have ended. A dramatic recovery in the UAE.  The start of a new real estate boom.  The concomitant collapse of problem loans.  A new improved "Vision".  At least 20/5 this time!

It really does pay to pay attention as they say.

In cases like this where the decision seems contrary to good sense, it makes sense to look for additional motives.  As we all know, regulators are charged with looking out for the health of the banking sector and the economy as a whole - and not just that of this or that bank.

That suggests the Central Bank of Kuwait's decision is motivated by a higher  and more pressing need: raising Burgan's share price to a more appropriate level -- defined as one that makes its shares worth more in a collateral pledge and which increases the equity and perhaps income of its owners (FVTPL).  And goal so compelling and universal that a regulator "down South" might share a similar view, though of course for different banks.

As all good bankers know it is a cardinal rule of commercial banking to "have a second way out".  Even given the apparently generous pricing mooted on United Gulf Bank's purchase of 13% of Burgan is it really wise to rely solely on this "auction" to achieve this nationally important economic goal?  Apparently not!

And finally, yes, Burgan does hold Treasury Shares (some 29.6 million of them if I'm not mistaken) though I rather doubt they sought the CBK's approval because they want to sell them.  And of course, in such a case, the CBK could have limited its approval to a sale only.

[13:28:52]  ِ.موافقة بنك الكويت المركزي لبنك برقان بشراء ما لا يتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية ان بنك الكويت المركزي وافق بتاريخ ‏
ِ21-7-2010 علي طلب بنك برقان بشراء او بيع مالا يتجاوز 10%‏
من اسهمه المصدرة لمدة سته اشهر اعتبارا من تاريخ انتهاء الموافقة ‏
الحالية في 5-8-2010 وذلك مع ضرورة الالتزام بما وضعه البنك المركزي
من ضوابط وشروط في شأن تملك البنوك لاسهمها اضافة الي ضرورة الالتزام
باحكام المداة ( 115 ) مكرر من قانون الشركات التجارية واحكام القرار ‏
الوزاري رقم (10) لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم (11) ‏
لسنة 1988 ورقم ( 273) لسنة 1999

1 comment:

Vanguard said...

Thanks for the insight...