Monday, September 6, 2010

Gulf Bank to De-Emphasize Investments and Focus on Core Banking Business


Issa Abdul Salaam at Al Qabas quotes informed sources that Gulf Bank is exiting several funds and reducing its share in others during the rest of the year.

GB reportedly withdrew from one fund it had invested in the "past months" with a view to realizing profits in 3Q and 4Q this year and that it intends to exit from several foreign funds.

This represents a change in strategy from that approved by the previous board.  The new board's strategy calls for the bank to focus on its core (banking) business.

Three comments:
  1. Sticking to one's core competence is a sensible strategy.
  2. Many a change in strategy is motivated more by the need for cash than  long range planning.  The number of lines of business that suddenly become "non core"  are in direct proportion to the cashflow deficit.  Gulf Bank certainly has some serious challenges in its loan portfolio.
  3. When picking the "core" business to focus on, it's good to pick one that one has a future.  Whenever I read PR from some firm announcing that it  has made a strategic decision to focus on its core business, I wonder why it wasn't in the first place.  I also recall two business school cases.  In the first,  Pan American Airlines, the company divested itself of Intercontinental Hotels to focus on its airline franchise.  By contrast, in the second, Greyhound/Dial Corp, the dogs were (largely) sold.  One positive thing in this case, the core commercial banking business is a protected one in Kuwait.  And there's probably more of a long range future in commercial banking in Kuwait, if one can get credit underwriting right.

2 comments:

Laocowboy2 said...

GB always had a good retail franchise but its corporate banking side was not as strong. Having decided long ago not to go international, the small size of the Kuwait market meant limited growth prospects in retail banking and (I would guess) hence the push into corporate lending with the woeful results now seen.

Kuwait is indeed a protected market in that the entry and activities of foreign banks and/or new Kuwaiti ones is very circumscribed. However it is also a small one, and one where the existing banks may find it difficult to maintain their cosy cartel of high fees and commissions - if competition does not drive these down, the Central Bank probably will over time.

Leaving aside NBK (which has managed to escape the strategic limitations and avoid brain dead lending), most of the other banks lack scale to be properly international. The real choices therefore are either (a)to remain domestic, simplify the business model (i.e. shrink if necessary) and concentrate on shareholder value - be a CFC in other words -or (b) amalgamate to give the bulk that would allow an international strategy.

Abu 'Arqala said...

LC2

An excellent analysis of the Kuwaiti banking scene.

I'd add a couple of other points.

A focus on asset based rather than cash flow lending. With often a rather abject failure to think through asset values and the ability to realize them in event of loan default.

A problem with the underlying economy where the major economic activity is rent seeking and/or speculation rather than productive activity. What does one say about a "industrial sector" (as defined by the KSE) where more than 60% of assets are "investments". Often puffed up by manipulation. With lending for interest or additional principal supported by such "hot air".

A subsidiary problem is often the holder of the asset is firmly convinced that it really has this value. While a regional phenomena, I've met more Kuwaitis with an inherent belief in "hockey stick" economics than other GCC locals. And who seem genuinely hurt when it's pointed out to them that value of their asset has departed from reality. I've lost more than one client that way.

Mitigating against consolidation is the problem (common to the area) of which major shareholder is going to step back and let the other be the Chairman. I've seen Kuwaitis stubbornly hang on - preferring to be the chairman of a small firm (with limited value) rather than be a board member and major shareholder of a company with much more value. Though again this is not purely a Kuwaiti national trait. Of course, there are some direct "economic" benefits (other than ego) to running a bank. One generally finds a rather sympathetic lender with a rather enhanced ability to "value" assets.