VZCZCXRO9622
RR RUEHDE RUEHDH RUEHDIR
DE RUEHKU #0982/01 2871041
ZNR UUUUU ZZH
R 141041Z OCT 09
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC 4036
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 KUWAIT 000982 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ARP, EED/IFD/OMA 
STATE PASS FEDERAL RESERVE 
TREASURY FOR IA 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON KU
SUBJECT: THE KUWAIT BANKING SECTOR: 2009 PRIMER 
 
REF: 
¶A. 08 KUWAIT 1155 
¶B. 08 KUWAIT 1123 
¶C. 09 KUWAIT 853 
¶D. 09 KUWAIT 619 
¶E. 09 KUWAIT 599 
¶F. 08 KUWAIT 1183 
 
¶1. (SBU) Summary: Kuwait's banking sector, the third largest in the 
GCC after Saudi Arabia and the United Arab Emirates, comprises 18 
financial institutions, including market leaders National Bank of 
Kuwait (NBK), and Kuwait Finance House (KFH), the second largest 
Islamic bank in the world.  With the notable exception of Gulf Bank 
-- which required GOK intervention and a major recapitalization in 
late 2008 following currency trading losses -- Kuwait's banks have 
weathered the global financial crisis.  This cable outlines the 
banking sector as a whole, and describes the major players within 
each of the two main sub-sectors: commercial banking and Islamic 
banking.  End Summary. 
 
¶2. (U) The banking sector of Kuwait is one of the largest in the 
Gulf region, with total banking assets amounting to KD 39.1 billion 
or USD 136.4 billion (as of August 2009), according to the Central 
Bank of Kuwait.  The banking sector comprises 18 banks: six 
conventional (commercial) banks, three Islamic banks, eight branches 
of foreign banks and one specialized bank.  The six commercial banks 
include market leader National Bank of Kuwait (NBK), Commercial Bank 
of Kuwait (CBK), Gulf Bank, Al-Ahli Bank of Kuwait, the Bank of 
Kuwait and the Middle East (BKME) and Burgan Bank.  BKME received 
permission from the Central Bank to convert to an Islamic bank, a 
process that is expected to be completed in 2010.  The three 
Sharia-compliant banks are currently Kuwait Finance House (KFH), the 
clear market leader in Islamic banking, Boubyan Bank, and Kuwait 
International Bank (KIB, formerly Kuwait Real Estate Bank, which 
converted to an Islamic bank in mid-2008).  On September 15, 
Kuwait's cabinet issued a decree forming Warba Bank, which will 
become the newest Islamic bank in the country.  KIB's conversion 
leaves one remaining specialized bank, the Industrial Bank of 
Kuwait. 
 
¶3. (U) The Central Bank has granted licenses to 10 foreign banks 
thus far, eight of which have active operations in Kuwait.  BNP 
Paribas and HSBC began operations in 2005, Citibank and the National 
Bank of Abu Dhabi opened in 2006, Qatar National Bank commenced 
operations in 2007, and Doha Bank opened its office in 2008. 
Dubai-based Mashreq Bank began operations in mid-2009 and the Bank 
of Muscat and Riyadh-based Al Rajhi Bank (the largest Islamic bank 
in the world) are both expected to open branches in Kuwait in 2010. 
The Bank of Bahrain and Kuwait (BBK) has operated in Kuwait since 
¶1977.  Foreign-owned banks' branches are not allowed to compete in 
the retail banking sector and are confined to one branch office in 
Kuwait. 
 
¶4. (SBU) Total assets of Kuwaiti banks stood at KD 39.1 billion (USD 
136.4 billion) as of August 2009, compared with KD 38.7 billion (USD 
135.1 billion) for August 2008 and KD 32.1 billion (USD 112.0 
billion) for August 2007.  Kuwaiti banks' aggregate profit for the 
first six months of 2009 amounted to KD 223.9 million (USD 781.5 
million), compared to KD 634.2 million (USD 2.2 billion) for the 
first six months of 2008.  Unsurprisingly, most banks experienced a 
significant decline in profits during this period, as Kuwait's stock 
and property markets dropped sharply and lending growth decelerated. 
  Gulf Bank, which was hit by currency trading losses totaling more 
than USD 1.4 billion in late 2008, was the only large Kuwaiti bank 
to record a net loss in the first half of 2009. 
 
Top Three Commercial (Non-Islamic) Banks 
---------------------------------------- 
 
¶5. (SBU) National Bank of Kuwait (NBK): Kuwait's preeminent bank, 
NBK, was established in 1952 by a consortium of Kuwaiti merchant 
families and was the first indigenous bank in Kuwait and the wider 
Gulf region.  With total assets of KD 11.6 billion (USD 43.4 
billion) as of December 2008, NBK is ranked among the top 300 banks 
in the world and is the only bank in the Arab world to be named in 
Global Finance magazine's "50 safest banks" rankings for 2009.  NBK 
has the widest branch network of any financial institution in the 
Middle East, with 155 branches worldwide including 69 in Kuwait. 
The bank enjoys an A+ credit rating from Standard & Poor's (S&P) and 
is believed to have minimal exposure (approximately USD 10 million) 
to the troubled Al-Gosaibi and Saad groups in Saudi Arabia.  The 
bank's major shareholders include some of the same Kuwaiti merchant 
families party to the bank's establishment, including the Al-Bahar, 
Al-Sayer, Al-Sager, Al-Kharafi, Al-Fulaij and Al-Hamad families. 
NBK's chief is Ibrahim Dabdoub, a highly respected Palestinian 
banker who joined the firm in 1961 and has served as CEO since 1983. 
 
KUWAIT 00000982  002 OF 003 
 
 
 NBK's management is now seeking to compete with KFH in the Islamic 
banking sphere -- in recent weeks the bank has purchased large 
stakes in Shariah-compliant Boubyan Bank from the Kuwait Investment 
Authority (KIA) and other investors, bringing NBK's ownership of 
Boubyan to 40%.  NBK spokesmen have made clear the bank's intention 
to become the majority owner of Boubyan Bank, currently Kuwait's 
second largest Islamic Bank. 
 
¶6. (SBU) Gulf Bank:  Kuwait's third largest bank by assets (KD 4.9 
billion or USD 18.4 billion), Gulf Bank was, until recently, hailed 
as the country's fastest growing bank.  However, the bank's 
reputation suffered following the October 2008 disclosure of 
currency trading losses exceeding USD 1.4 billion and the subsequent 
efforts to shore up the firm's capital base and appoint a new board 
of directors; KIA took a 16% stake in the bank as part of a USD 1.4 
billion recapitalization (refs A and B).  Media and other sources 
suggest that Gulf Bank may also face significant exposure to the 
ailing Saad and Al-Gosaibi groups in Saudi Arabia.  While the bank 
has declined to reveal the extent of such exposure, sources in the 
financial community assert that the figure is approximately USD 400 
million to USD 500 million.  Gulf Bank's S&P rating is currently 
BBB+.  In addition to the KIA, the bank's other major shareholder is 
the Alghanim family.  (Note: Kutayba Alghanim replaced his estranged 
brother, Bassem, as chairman of the board of the directors following 
the October 2008 losses, before handing over to Ali Al-Rashaid 
Al-Bader, a respected former KIA chief.  Kutayba's son, Omar, the 
CEO of Alghanim Industries, now represents the family on the board 
of directors.  End Note).  Gulf Bank's CEO is Michel Accad, a 
Lebanese national, who replaced American Louis Myers in April 2009. 
 
¶7. (SBU) Commercial Bank of Kuwait (CBK): One of Kuwait's big four 
retail banks, CBK (also known as Tijari) was established by Amiri 
Decree in 1960 and now operates 53 branches in Kuwait.  CBK has 
assets of approximately KD 4.3 billion (USD 16 billion) and posted a 
modest profit for the first six months of 2009.  The bank's S&P 
credit rating is A-.  Investment vehicles controlled by the ruling 
Al-Sabah family own approximately 23% of CBK.  The bank's chairman, 
AbdulMajeed Al-Shatti, was chairman of the GOK's ad hoc committee on 
dealing with the effects of the global financial crisis, which 
convened intermittently in late 2008 and early 2009. 
 
Islamic Banks: One Plus Two 
--------------------------- 
 
¶8. (SBU) Kuwait Finance House (KFH): Established in 1977, KFH is one 
of the world's preeminent Islamic banks and the second largest bank 
in Kuwait.  KFH owns banks in several Middle East and Southeast 
Asian countries and is one of the biggest retail banks in Turkey 
(Kuveyt T|rk Bank), Bahrain and Malaysia.  The bank has won several 
accolades as Best Islamic Bank in the world from publications such 
as EuroMoney.  KFH operates 47 branches and claims to hold 25% of 
all deposits in Kuwait.  Its assets stood at KD 10.5 billion (or USD 
39.3 billion) in December 2008, lagging market leader NBK by KD 1.1 
billion (or USD 4.1 billion).  KFH's S&P rating is A-.  The bank's 
largest shareholders are GOK entities, namely the KIA (24%), the 
Public Authority for Minors Affairs (10%) and the Awqaf Public 
Foundation (8%).  KFH's chairman and managing director is Bader 
Abdul Muhsen Al-Mukhaizeem. 
 
¶9. (SBU) Boubyan Bank: Founded in 2004, Boubyan operates 14 branches 
in Kuwait and has assets of approximately KD 840.5 million or USD 
2.9 billion (about one-thirteenth the size of those of KFH).  The 
bank has become the vehicle through which NBK hopes to build up its 
own Islamic banking capabilities.  As noted above, NBK has 
aggressively increased its ownership in Boubyan in recent weeks, 
bringing its ownership stake to 40%, and declared its intention to 
become the bank's majority shareholder.  Boubyan is not rated by 
S&P. 
 
¶10. (SBU) Kuwait International Bank (KIB): The former Kuwait Real 
Estate Bank, incorporated in 1973, formally converted to an Islamic 
bank in 2007 and has nine branches in Kuwait.  The bank's assets 
stand at KD 1.08 billion (or USD 4.0 billion).  KIB posted a modest 
loss for the first six months of 2009 and is expected to post a loss 
for the third quarter too, given exposure to the ailing Dar 
Investment firm.  The bank's largest shareholders are the Al-Sabah 
controlled Kuwait Projects Company (KIPCO) (8%) and Matrook Trading 
& Contracting Co. (7%).  The bank's General Manager for the past two 
years has been Adil Ahmed, a Pakistani-Australian banker, who is 
stepping down this month.  KIB's efforts to recruit a successor for 
Ahmed reportedly have been stymied by the Central Bank, which has 
rejected two candidates, allegedly because they lack Islamic banking 
experience.  KIB is not rated by S&P. 
 
¶11. (SBU) In September 2009, the GOK announced the establishment of 
a fourth Islamic bank in Kuwait, Warba Bank.  76% of the new bank's 
 
KUWAIT 00000982  003 OF 003 
 
 
shares will be held by Kuwait's more than one million citizens -- 
who will be allocated the shares free of charge -- and the remaining 
24% will be owned by the KIA.  Post's sources indicate that the bank 
will not commence operations until 2010 or even 2011 (septel). 
 
Regulatory Environment 
---------------------- 
 
¶12. (SBU) The Central Bank of Kuwait, operating largely under Law 32 
of 1968, has responsibility for regulating the banking sector, 
including, as of 2003, all Islamic banks.  Under the 23-year 
leadership of Governor Shaykh Salem AbdulAziz Al-Sabah, the Central 
Bank has been a generally conservative banking supervisor with high 
general and extraordinary provisions for non-performing loans and a 
required "risk based" capital adequacy ratio of 12%.  The major 
losses at Gulf Bank, however, as well as losses at Kuwait's 
investment companies (which are regulated by the Central Bank, but 
as non-deposit taking institutions have not received the same level 
of scrutiny) have demonstrated the need to improve banking 
supervision to deal with financial innovation.  The Central Bank's 
remit does not formally extend to the Kuwait Stock Exchange (KSE) -- 
the Arab's world's second largest bourse -- and the lack of a 
capital markets authority continues to undermine foreign investors' 
confidence in the transparency and efficiency of Kuwait's financial 
markets.  All of Kuwait's locally-owned banks are traded on the KSE. 
 The GOK's Ministry of Commerce and Industry produced draft 
legislation for a capital markets authority in late 2007; the law 
has been discussed and edited several times by the National 
Assembly's economic and financial committee since that time, though 
there are no plans for a floor debate in the near future. 
 
Banking Outlook 
--------------- 
 
¶13. (SBU) Although profits are down and reportedly non-performing 
loans are up, Kuwait's banks have weathered the effects of the 
global financial crisis relatively well.  Even Gulf Bank, its 
reputation tarnished and facing further book losses relating to the 
Al-Gosaibi and Saad groups' woes, is sufficiently capitalized to 
ride out likely operating losses for 2009.  Contributing to the 
relative stability of the sector is the generally conservative and 
risk-adverse approach of Kuwaiti banks' boards of directors and 
executives.  The conservatively-run KIA's large stakes in several 
banks is also seen as a brake on risk-taking.  The Central Bank has 
promoted stability by ensuring adequate liquidity in the banking 
system and keeping bank chiefs' on a short leash with respect to 
risky investments and trading. 
 
¶14. (SBU) However, Kuwait's banks are not out of the woods yet.  In 
addition to possible exposure to the Al-Gosaibi and Saad groups, 
some of Kuwait's banks -- including CBK and Gulf Bank -- face 
exposure to Kuwait's troubled investment sector.  Some of Kuwait's 
largest investment firms, including giants Global Investment House 
and Dar Investment have defaulted on multi-billion dollar 
obligations and continue to negotiate restructuring and standstill 
agreements with creditors (see refs C, D, E and F for further 
information).  Additionally, lingering weaknesses in the local real 
estate market and Kuwait's underperforming stock market could also 
hurt Kuwaiti banks' balance sheets in the coming months.  Post will 
continue to monitor and report on Kuwaiti banks' exposure to ailing 
investment companies. 
 
JONES 
1