Saturday, September 25, 2010

HSBC: “No Provision Relief for Kuwaiti Banks Until 2012”



AlQabas published a summary of a recent HSBC research report in its Sunday issue.

Here's a quick summary of the main points:
  1. HSBC notes the dramatic growth in distressed loans at Kuwaiti banks – from 5.3% in 2008 to 9.7% in 2009. 
  2. And predicts that the banks will continue to make substantial provisions this year and next only reaching a normal level of provisions in 2012. 
  3. That being said, there should be a recovery in ROE for 2010.
  4. Banks in Abu Dhabi and Kuwait were the worst affected among GCC banks. However, Kuwait has average provisions equal to 10% of total loans while Abu Dhabi only 4%. 
  5. A concentration on loans to real estate, construction, and investment companies is responsible for the decline in the value of Kuwaiti bank assets. 
  6. Real estate exposure:  Given the absence of Kuwaiti government spending on infrastructure or development projects during the boom years (2005-2008) credit was to the private sector largely to individuals and unlisted companies. The focus was on commercial, residential and investment real estate. Listed real estate companies only account for 13% of the total of such loans. 
  7. Investment firm exposureLoans to investment companies were KD2.8 billion with KD1.2 billion to conventional firms and KD1.5 billion to "Islamic" firms.  The loans granted were largely used to fund investments in real estate and regional stock markets (thus increasing the lenders' total exposure to these sectors). 85% of investment companies' assets are in the GCC as per the IMF. Since the crisis hit, banks have seen their loan security drop by at least 50% as per HSBC's estimates, though it does note that in the absence of transparency the true impact is not known. 
  8. Consumer loans:  These extensions of credit are believed to be of better quality because  they are secured by rentals and salaries. HSBC notes that most Kuwaitis are employed by the Government, the implicit presumption being that their incomes are secure.
There were two interesting tables accompanying the article, which I've reproduced below.

First, Kuwaiti bank exposure to real estate as a percentage of shareholders' equity.

Amounts in KD millions.

BankReal Estate & Construction ("REE")Shareholders EquityREE % of Equity
NBK
1,450
1,871
78%
CBK
   733
   440
167%
Burgan
   976
   422
232%
KFH
1,591
1,537
194%
Gulf
1,495
   391
382%

Second, Kuwaiti bank exposure to investment companies.

Amounts in KD millions.

BankExposure% of TotalShareholders' EquityExposure as % of Equity
Gulf    486  18%   39180%
Burgan   190    7%   42245%
CBK   269  10%   44061%
NBK   216    5%1,87112%
KFH   944  34%1,53761%
Others   658  26%--------
Total2,763100% ---- ----
 
From the above one can draw some conclusions on relative business models and underwriting standards.  

Of course without knowing the details of the loans and in particular the security obtained, these can be only preliminary. 


As usual, the pattern seems to be repeating itself.  One bank is distinguished by its prudence.  And some of the same names seem to be pushing the envelope. 

1 comment:

Abu 'Arqala said...

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