Bucking the trend of massive bank losses occurring in the US and Europe, Kuwait Finance House (KFH) has posted a profit before charges for 2008, despite falling revenues.
The finance house's unaudited full-year net profit totalled KD157 million ($542 million) on revenues of KD884.9 million. Given the current economic environment, however, KFH said it would retain KD211 million as a "provision".
After the KD211 million provision, KFH lost anywhere between KD48 million and KD54 million for the year. Full-year and fourth-quarter audited results have yet to be released.
"We are already observing a significant fall in bank reserves, which account for the bulk of the monetary base in all GCC banks," says a report by Gulf Finance House. According to the institution's research, Kuwait's banking sector reserves fell by more than 50% in 2008. Though KFH did not comment on the motives behind its KD211 million provision, the decision to retain capital is likely prompted by the halving of reserves and the tighter credit market.
In the fourth quarter, KFH's revenue fell 16.3% quarter-on-quarter to KD185 million. The revenue decline increased 3.7% from the previous quarter when it fell 12.5% quarter-on-quarter.
Despite the decline in revenues in the second half of the year, the bank managed to report an overall increase in income of 6.5% year-on-year. Revenues were undoubtedly boosted by the liquidation of some of KFH's real estate holdings in December. At the end of the month, the finance house's Malaysia subsidiary announced the liquidation of its first KFH Fund for Asian Real Estate valued at $101 million. The sale recorded a one-time net profit for the institution of $39.6 million.
The bigger picture
Kuwait's financial industry is beset with liquidity issues. The country has been subject to the Gulf's only two bank crises - the October bailout of Gulf Bank and the December default of Global Investment House (GIH).
Earnings at all Kuwait's banks are expected to be lower for the year. National Bank of Kuwait, the country's largest by assets, reported a 78% decline in fourth-quarter profits earlier this month.
Heavy involvement in equities and markets outside the Gulf are behind the liquidity issues in Kuwait's banking sector. Gulf Bank's bailout came after poor bets on the euro-dollar exchange rate and GIH defaulted after incurring significant losses on its global equity portfolio.
"What has hit those banks that were exposed [to the global credit crunch] was equity exposure to companies like Lehman Brothers or Bear Stearns," says GFH chief economist Ala'a Al-Yousuf.
Though, falling revenues are unlikely to hamper KFH's expansion abroad. "In spite of the current economic scenario and its negative effects on the local markets, the opportunity to overcome the turmoil is possible and within reach," says KFH chairman and managing director Bader Al-Mukhaizeem. "This is evident in KFH's expansion policies that have been resistant and stayed on track throughout the economic crisis."
KFH continues to seek Islamic finance investments in Asia. Already incorporated in Malaysia, the bank operates representative offices in Australia and Singapore. The finance house's investment last August in the $275 million Peninsula Project in Shenzhen continues to move forward. Data on revenue for the finance house's Asian operations is unavailable.
