NBK, Kuwait’s biggest bank by market value, announced today a bottom line growth of 4% in FY09. Profits recorded were KD265.3 million compared to 255.3 in FY08. Q4 earnings surged from KD11.7 million in Q4 2008 to KD63.7 million in Q4 2009. This growth was mainly attributed to the bank’s expanded operations. Operating income increase by 2% to KD518 million and total assets rose by 7.8% to 12.9 billion. There were no details given on the level of provisions taken by the bank.

“Our regional expansion strategy proved successful as confirmed by the resilience of our profits and the diversity of our income sources. Our operations outside Kuwait continued to provide a stronger foundation for the stability of our profits with growing contributions from Egypt, Qatar and Turkey.” CEO Ibrahim Dabdoub said.

“National Bank of Kuwait’s results are in line with our expectations, and if you compare to last year it’s an improvement for sure. Kuwaiti banks have been more resilient to the global financial crisis than others” Naveed Ahmed, a financial analyst at Global Investment House.

The stock reacted positively to the announcement and closed at KD1.100, up 40 fils (3.7%). Results were kind of preannounced as CEO Ibrahim Dabdoub said at the World Economic Forum’s annual meeting in Davos, Switzerland a couple of days ago that NBK expects to post a “small growth” in 2009 profit.

UPDATE:

NBK is currently trading at a P/B multiple of 2x, whereas the Kuwaiti and the GCC banking sector trade at a multiple of 1.8x and 1.4x respectively.

I know I misquoted Clinton’s famous election phrase, “It’s the economy, stupid.” For the US in 1992, it was the economy. In Kuwait, people wonder what is our problem. Some say it is political, others say social, and the financially savvy like to point to the economic side as the culprit. The best answer to that question is, “It’s everything, stupid.” Everything: we are dysfunctional from a political, social, and economic perspective.

Political:

The country is daily riding a roller-coaster of politics orchestrated by a  cynical populist parliament and a fragile inefficient government. The political roller-coaster is circulating in a never-ending fashion from impeachment to dissolution. When is it going to end? I don’t want to elaborate on the political side. For more, refer to my previous post titled, “Parliamentary plays derail reform.”

Social:

Why it it that everyone in Kuwait regardless of their wealth live the most lavish lifestyle? The answer is simple: why not? Charge it on a credit card and expect the government to forgive loans. It is sad that a graduating senior from a Kuwaiti high-school’s dream is not to get into Harvard, but to drive a Maserati and upgrade to a Ferrari after college graduation. I remember a time when I was a kid and I used to enjoy going to my family’s weekly gathering to go to the supermarket and buy candy. You know what is a Kuwaiti kid’s dream nowadays? A Blackberry phone and an Abercrombie & Fitch t-shirt. This consumer mentality has to come to an end. More importantly, the parenthood relationship between the government and its citizens has to be abolished. There is severe moral hazard in our nation and its a vicious downward spiral cycle. Our government acts as a free collection agency for businesses. Our parliament sponsors morally hazardous acts such as sending families for tourism in the name of sickness and proposals such as debt forgiveness and “attractive” laid-off employee benefits. Our citizens enlist in unheard of universities in the likes of Zimbabwe and the Philippines to get a high-paying government job doing, well, nothing.

Economic:

We were the first to establish a stock market in the GCC, but today we are the only country without a governing Capital Markets Authority. It hurts, so I don’t want to talk about where we were, coulda, shoulda, and woulda. I wish I could say it in a different way, but what is happening in Kuwait’s stock market is a disaster. The domino effect is unstoppable without government intervention, regulation, and a complete overhaul of the economic system. We desperately need to instill confidence in our stock market. We want to send a message to everyone that what happened during Souq Al-Manakh crisis was a one-time event that isn’t currently in the making.

The government has to take the initiative and push for a new era of economic transparency and development. We need a Capital Markets Authority that acts as a watchdog that punishes all malpractices in the industry. Isn’t it humiliating to see the United States question manipulations by Kuwaiti individuals and companies while no one in Kuwait addresses these issues? Isn’t it ironic that market leaders are currently on the verge of bankruptcy? With added transparency, investors would have enhanced clarity and can potentially make an informed decision as opposed to gamble or leverage on an insider tip. Rest assured that the wounds of burnt foreign investors will take time to heal and it will be challenging to win them back. The establishment of a Capital Markets Authority is pivotal to the critical process of confidence restoration in our financial system. What we lack in Kuwait is priorities. Why don’t we organize and push for passing the Capital Markets Authority in the parliament? Let us prioritize our problems and address them in a one-by-one basis instead of being overwhelmed by their magnitude.

After the Agility controversy last week, people are left wondering what could stop the free-fall of our stock market? As with any solution, there is a short-term and long-term approach that need to be addressed in tandem. Establishing a Capital Markets Authority helps in the long-term, but shorter-term we have to focus on addressing the issue at hand. The reality is that our stock market is made-up of a few Chaebols*. These few Chaebols have numerous companies attached to them. These numerous companies ultimately depend on the success of the few and the few are all in trouble. The biggest four companies by market capitalization in the Kuwait Stock Exchange are Zain, NBK, KFH, and Agility. There used to be Dar and Global, but there are gone.  Zain is operationally challenged and its owners want to bail-out (but seemingly can’t), NBK will be hit hard if Zain owners can’t sell their stake, KFH depends heavily on real-estate and with the wealth destruction in Kuwait there is no hope there, and Agility’s sheer existence is being challenged by a complex fraud case.

I believe government intervention should be through recapitalizing banks. The government should simply buy a 5-10% stake through new share issuance by all banks. This will provide banks with much needed cushion for taking write-downs. Instead of the never-ending provisions drama, let us mark down these assets, take the hit, and move on. The US is a perfect example of such successful approach. Establishing a portfolio that buys into stocks and tries to lift the market is a very limited solution. The government is only addressing a symptom when it does that and should do that simultaneously with other solutions proposed.

*Chaebols: large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies.

National Bank of Kuwait (NBK) finally found middle ground and struck a deal with Commercial Bank of Kuwait (CBK) to buy 19.1% of Boubyan Bank (Islamic). The total consideration is around KD 120M; valuing Boubyan Bank shares at 550 fils/share . CBK made KD 27M in the deal. NBK has an authorization until June 21 from the Central Bank to buy up to 40% of Boubyan Bank’s shares.

Investment Dar used to own the Boubyan Bank stake which it used as collateral for loans from CBK. The financial tsunami (god how much I hate this word!) caused highly leveraged Investment Dar to default on various loans. Consequently, they lost their buyback option on the Boubyan Bank stake and the title transferred to CBK.

According to Bloomberg.com, Investment Dar said in a statement today that it has filed three lawsuits with the Kuwaiti judiciary against Commercial Bank of Kuwait. The first accuses CBK of “fraud and dishonesty,” the second is to prevent CBK dealing with the shares and the third lawsuit demands the return of the shares to Investment Dar.“Investment Dar warns the National Bank of Kuwait, or any other party, against getting involved in this dispute so as not to subject its reputation and the interests of its clients and shareholders to risk,” Investment Dar said in the statement.

Enough with Investment Dar’s whining! With the conclusion of this deal, NBK officially grew a little but potentially prolific beard. I believe that NBK will not only add to their never-ending stream of winning products, but also transform the Kuwaiti Islamic market into a more competitive field. It is no hidden secret that Kuwait Financial House (KFH) has dominated the Islamic area for a very long time and I am glad they now have substantial competition because this will definitely enhance product quality/prices.