Abstract
This research paper was had one objective: to investigate the circumstances that saw the Kuwait Gulf Bank survive a financial crisis. Kuwait Gulf Bank is one of the largest financial institutions in Kuwait and, therefore, one of Kuwait’s major lenders. Before the financial crisis, the Bank had been very successful in its operations. It first became operational in 1961 after having been established in Fahad al-Sahem Street the previous year. Its headquarters were, however, later moved to Abdulla al-Sahem Street three years later. In the years following that, it has continued to grow and has been able to finance several economic ventures in the country. The report below is a detailed analysis on how the bank’s performance has been overtime.
a). These financial statements were written up using the historical costs, which were adjusted for any land or buildings’ revaluation. Any revaluations for dealing securities that could have happened within these two periods would also have been included.
b). As for the Government treasury bonds and Treasury bills, the following notes apply:
Treasury bills have been indicated at cost, and adjustments for any discounts that had been amortized from purchase date to the date of maturity, so as to create a continuous profit, were made. They mature in six months or less. Government treasury bonds have however, simply been indicated at cost. According to the instructions put forward by central Bank of Kuwait, the bills and bonds that were issued by the same are to be stated as liquid assets.
c). Dealing securities have been stated on documented stock exchanges are carried according to their market value. Any adjustments that were made to the market value were indicated in the income statement.
d). Government debt bond and Investment securities have been stated at cost. However, in the case of Investment securities, provision has been in accordance with the management’s discretion.
e). Change in equity in the above financial statements is the aggregate of consideration paid when the Banks shares are sold and the direct costs.
f). Some assets, however, have not been included in these financial statements, and these are those that are held in a fiduciary capacity. This is because these assets are not regarded as belonging to the Bank. The research was a specific one.
The figure shown in cash and short-term funds is a sum of the cash at hand and that which is in the Bank’s current accounts held in other Banks and the deposits that will mature within a month and are currently held in other Banks or financial institutions.
Income Statements for the periods ending in 31st December 2000 and 31st December 1999.
The above income statements show that there was an increase in the profit received from a profit of 29.4 million in 1999 to about 34.4 million in 2000. This shows that there had been increased business activity in 2000, a fact that could be attributed perhaps to better marketing strategies that were put in place, and boom periods in the economic cycle. Staff expenses and depreciation costs have however, reduced. This may be a result of reducing the number of employees or an absence of bonuses in the year 2000.
In order to add exclusiveness to our analysis, we analyzed the banks performance both before recession and after it.
Pre-Recession: During 2005-2007, the net profit of the bank increased consistently over the years. However, our vertical analysis indicates that the net profit margin of the bank in reference to Interest income has been declining year over year. During 2005, the net margins of the company was 62.65%, which during 2006 and 2007, decreased to 44.48% and 41.37%, respectively. The reason for the decline was high proportion of interest expense, which were increasing consistently over the years and declining proportion of fees and commissions that lead to erosion of the major portion of net interest income of the bank.
Recessionary Period: During 2008 and 2009, the bank, just as the global economy, was hit back by the financial crisis and the affect could clearly be seen in the income statement of the bank. During 2008 and 2009, the bank suffered significant losses, amounting to 359.516 Million and 28.073 Million, respectively. Important to note that during 2008, the interest income of the company was just 332.564 Millions which were only 5.47% higher than the previous year. On account of low interest income, the operating and net profits of the company eroded significantly, with the proportion of operating income to interest income remaining only 5.24%.
Later during 2009, the bank, just as other global banks, curtailed its operations and the interest income of the bank stood only at 208.98 Million. However, still the bank could not recover completely from the losses and it the year with the net loss of 28.073 Million.
Post-Recession: The bank during the post recessionary period from 2010-2013 has improved its performance and it has successful in maintaining an increasing trend in net profit margins. The graph below indicates the net profit margins and the related trend in the bank for the period 2010-2013:
- Literary Review.
The Kuwait Gulf Bank was formed into a legal cooperation in the year 1960 on November 23rd. However, it opened for business in 1961 on October 5th. The Bank had humble beginnings as it had its first branch in a rented flat in Kuwait City on Fahad Al-Salem Street. It began on 1.8 million Kuwait dinars (which would perhaps translate to about six million US dollars) with only fifty employees. The Bank saw rapid expansion, and, therefore, by 1964, it had moved its headquarters to Abdulla Al Salem Street and by 1974, this was changed to Mubarak Al Kabir Street. The Bank was listed publically in the year 1984.
Since it began, the Gulf Bank has strictly adhered to the definition of Corporate Governance which targets the discipline of institutions in compliance with the international, and regulatory standards as endorsed by related regulatory authorities. This mentioned system is achievable by assigning duties and responsibilities of the executive management and organization’s board while very carefully considering the security of rights of the stakeholders, and shareholders.
Like any business, Gulf Bank had its fair share of tribulations while growing. It benefited from adequate liquidity which was based on improvements to corporate asset quality, and favorably liquid local deposit markets. For this reason, it was left highly exposed to liquidity risk. The major driving force of the Kuwaiti economy is oil. In addition to this, the public sector dominates the economic sphere. The over-dependence on the public sector and oil made it hard to grow profitably due to concentration of the lending of Gulf Bank to these areas at the expense of the industrial sector.
There was a stock market crash in 1982 in the wake of one of the worst speculative bubbles (generated from the lack of business diversity and the extreme liquidity born due to substantial oil exports windfalls). This crash left the Banking sector with a paralyzing portfolio of non-performing loans. The situation of the Banking sector also began to worsen due to the Iraqi regime invasion of Kuwait. The Gulf Bank foresaw if they were to overcome these difficulties, they would have to strive to expand the scope of their activities into areas such as investment and insurance which were beyond the traditional Banking services. The ability of Gulf Bank to overcome these challenges would also highly depend on how efficiently the Bank was run to optimally use labour, physical capital and financial resources to regenerate profitable assets.
One principal feature of Kuwait Gulf Bank is the mixed nature of ownership where the percentage government shareholdings come to 17.60%. This joint ownership and the reputation the government had gained as the “bailer of last resort” (owing to the fact the government had intervened to bailout the financial system) left the Bank liable to the inclination to imprudent behavior. In the Banking system, discretion is key as it is a dog eat dog world. The main competitor of the Kuwait Gulf Bank was (and still is) the National Bank of Kuwait who had government shareholdings only came to 1.67%. Therefore, the Gulf Bank had to take required measures to eliminate imprudence to keep afloat of the cut throat competition from its rival bank.
Healthy economic growth prospects in Kuwait, which were supported by the high oil prices, kept the demand for Bank credit high and thus the Gulf Bank was able to benefit from adequate liquidity. The Gulf Bank was the first Bank in Kuwait to introduce an ATM service in the country and through their success plan; the Bank was able to experience rapid growth before the year 2000.
Thus, by the year 2000, the Kuwait Gulf Bank had already made it to the Forbes list as number 1965 in the global 2000, number 1031 in assets and number 1837 in market value. All this, as mentioned above, is attributed to their goal-oriented success plan, which is expounded on below.
Their success plan entailed a clear focus on improved profitability which involved a more judicious evaluation of intended new projects using a more vigorous and objective assessment of new business. The plan also included the drive to comprehend and foresee customer needs thus poisoning the Bank as the most superb and lowest cost provider of these required services (Gundlach 2004).
As per this plan, every unit of the Bank became highly valuable as each part of the body is valuable to a human being for him to function as a person. For instance, the treasury became pro-active in overseeing the asset liability structure of the Bank with a clear cut objective of improving the fundamental operating ratios.
The Information Technology unit was charged with providing new and better services and products to meet the requirements of the customers and the human resource unit concentrated on the development of the personnel within the Bank. It became active in promoting, hiring, developing and keeping key people within the Bank with the required skills to ensure its growth. It was also charged with staff training (This provided staff with skills and competencies to achieve the targeted goals).
Using a random evaluation of the year 1999 to 2000, the employee headcount decreased from 737 to 623. However, there was an improvement in the income per employee and in turn a noted profitability per employee from 40% to 57%. This openly goes to show that the Kuwait Gulf Bank was more focused on quality than quantity.
There was an implementation of several initiatives than the Bank to create a clear customer focus across the group. In any successful service industry, it is known that the key secret is to always put the customer first and the customer is always right no matter the circumstance. Thus, the Bank strived to enhance customer satisfaction. There were drastic improvements in the customer service for instance, addition of evening Banking hours and the improvement of the speed of rendered services by the Bank through the simplification of processes and they also did away with any unnecessary paper work.
This enabled the staff the opportunity to focus on servicing the broader needs of the customer in turn improving the product penetration. Thus by the year 2000, the Kuwait Gulf Bank had already introduced over ten new products aimed at luring specific targeted customer groups (Gundlach 2004).
Their growth plan before the year 2000, had already incorporated retail Banking, corporate Banking (which had an extremely solid credit growth of over twenty five percent during the year 2000) and an international Banking strategy (which targeted key areas of competitive advantage by the year 2000. This was made possible by supporting commercial trade and also, they sought high quality international credits).To aid the international Banking strategy, the Bank also ensured the successful recruitment of Kuwaiti staff and also the proportion of Kuwaiti to non-Kuwaiti staff increased (Gundlach 2004)
It is possible to determine the technical efficiency of a Bank using cost frontier analysis. In this approach, Banks, in their role as financial intermediaries make use of labour, capital and other funds which have been lent to them, to produce earning assets. From the year 1994, the Kuwait Gulf Bank has operated very close to the cost frontier thus it has had a continuous improvement in the technical efficiency. This, the Bank has attributed to bigger Bank size, the larger share of equity capital in assets and more profitability (Savona 2011).
Until the year 2000, the Kuwait Gulf Bank had already quickly risen the ranks and together with its competitor, the National Bank of Kuwait, the two giants owned around fifty percent of the assets of the conventional Banks and were already dispensing around the same proportion of the total Banking credit. The Bank already had adequate knowledge of the loopholes in the Banking industry of Kuwait gained from sound experience and had already chattered a clear path forward. At this rate, it was obvious that nothing was going to stop the rapid growth of this Bank as it had already become a force to reckon with. And to attest to this, it is now fourteen years since and the Bank already has fifty seven branches across Kuwait and in just the year 2013, their profits had grown to Kuwait Dinars 99.6 million and the Bank is still heading for greater growth with new yet flexible growth plans.
- Kuwait Gulf Bank during the Financial Crisis.
The Bank went through a Bank run in 2008. This is a situation whereby many customers lose confidence in a Bank and therefore, may either withdraw their cash deposits, use them all to buy government bonds or move their funds to another financial establishment. Government bonds are usually preferred since the risk for losses is much lower than when one’s money is held at a Bank that may become Bankrupt in the near future.
Therefore, those who had large sums of money held at the Bank may have bought these bonds. This lead into losses that exceeded 375 million dinars, a result of all the bad debts the customer had to default on. The income statement below shows how business was doing in the year 2008, and the losses that resulted from the Bank run.
The table below shows the credit risk exposures during the period of the financial crisis
The Bank run is said to have been a result of bad derivative trades coupled with soaring impairments. Bad trades usually include investments that did not mature, bad decisions about which businesses or companies to invest in. A decline in the gross domestic product made the deteriorating Banking sector even worse. Gross domestic product refers to the total value of registered goods produced in the country. If the country’s economy is not doing very well, then the government may not have been in a position to lend the bank enough money to finance it out of the quagmire.
Another result of the financial crisis of 2008, is that financial institutions, Kuwait Gulf Bank, having been hit the hardest, suffered from liquidity pressure. In addition to that, the value of their assets held by the Banks declined. This is a common scenario when a company is thought to be on its way to insolvency, its asset value reduces and it is for this reason that many shareholders of companies choose to sell their shares, it seems to be of very little value at this time (Levete 2013).
Kuwait gulf Bank, however, was able to rise above all this. Generally, Kuwaiti Banking industry still experiences challenges such as high competition between the Banks. Among the Banks that seem to have recovered faster that others from the financial crisis of 2008 are Al - Ahli Bank, NBK, BKME and KFH. With the exception of NBK, they have all registered an increase in the NPL ratio. Furthermore, profits recorded after the financial crises are considerably lower than those of before the crisis.
Kuwaiti Banks performance turnaround is increasingly affected by the contraction in the local economy and exposure to risky asset classes. Kuwaiti Banks are exposed to considerable credit risk that is brought about by the unpredictability of the market. This is because the greater part of the Kuwaiti Banks’ loan portfolio consists of industries such as real estate, which is among the most risky sectors to invest in, as well as the construction industry.
In addition to this, the Bank lends a great deal of money for the purchase of securities and some more of it goes to investment companies. The huge loss suffered by the Kuwaiti Gulf Bank made the situation worse for the Banking industry in the country. The table below shows how the Kuwaiti Banks have been doing. This helps us understand how the Banking sector was affected by the 2008 financial crisis (Savona 2011)
- How to Deal with the Causes of the Crisis
Methodology
The Kuwait Investment Authority tried to allay the situation by subscribing to an emergency rights issue of KD375 million in December 2008. In addition to that, it also became a 16% shareholder. In august 2009, the board brought in a new management team of which Michel Accad was a member. The Bank had almost become completely impaired after the loss of KD359.5 million which is approximately $1.28 billion. It was in a financial morass at the time, with an NPL ratio of 30%.
Michel Accad took the position of chief executive officer at a time when the Bank had experienced a severe loss. His objective was to help the Bank recover from the Bank run completely and go back to being stable. It was around this time that steps were taken by the management towards healing the Bank’s horrid finances, and progress was successfully being made in this direction. It however took time and was not easy to achieve but by the first half of the next year, in July, the Bank had an NPL ratio 0f 7.6%, a significant drop from the terrifyingly high ratio of 30%. In order to achieve this, the Bank, under Accad’s management, set out to focus more on their competences and put a halt on the peripheral activities (Savona et al 2011).
- Description of Results.
The results of the adjustments put in place by Michel Accad and his team are evident in the financial statements of the following years. As shown below, the Bank has been able to recover from the devastating loss of 2008. The most significant of these results is that the net profit has increased over the period, as well as the changes in amount of eligible capital, which has increased significantly from 2001 to 2009. The latter factor may have facilitated further improvement in the financial situation of the Bank.
Composition of Capital
Statement of Financial Position for the Years 2011 and 2010.
Income Statements for the Years 2010 and 2011.
According to the above financial statements there was a big turn of events when Accad took the position of CEO. The Bank moved from the devastating loss of 2008 to the above profit in the year 2000 and a subsequent higher profit in 2011. This attests to the impact that good corporate governance has on the success of an enterprise.
One characteristic of Kuwaiti Banks is that they are owned by both the government and the public. A feature known as mixed ownership. This is true for most Banks, National Bank of Kuwait (NBK) being an exception since the public contributes a higher percentage of the shareholders. The Banking industry may also be affected adversely if the consumer loan bailout bill is passed by the government.
Islamic banking has also started to be a major competitor for convectional Banks. This could be the reason for the lower profits from convectional Banks. The Sharia Laws stipulate that customers should not be charged “riba” which means interest on loans. The workings of these Islamic banks is, therefore, very much different from the convectional banks as it is not clear to what extent this law is followed when it comes to banking.
These Sharia-Law-angled banks have registered a higher growth rate than the convectional banks, and this could be a result of the increasing confidence in its processes. They are also a major competition for investment houses. It is for this reason that convectional banks are becoming stakeholders by buying shares in such financial institutions, an example being how National Bank of Kuwait has become a 40% stakeholder in Boubyan Bank. In the near future, the latter will be having a 50% rights issue. Conventional banks are expected to subscribe to these. It is amazing just how the bank operates.
The financial statements below show a more recent depiction of the financial situation in Kuwait Gulf Bank.
The above performance could be a result of the Bank’s detailed policies related to credit provision, which are periodically revised and approved by the Board. These have helped the bank manage their risk effectively.
Conclusion
The ameliorations are particularly more remarkable as they occurred in the period of slow economic growth, despite the continuing regional and global economic concerns. In 2013, the Bank made more progress by reinforcing systems and controls, augmenting risk management, by ensuring that principles of good corporate governance are adhered to.
Delivery channels were also improved. Substantial upgrades in the IT department were put in place to ensure that the existing the technology and infrastructure was up to date. A tactical plan was made to ensure that the Bank’s capability was always at its optimum. A detailed scrutiny of the capabilities in every sector was done, objectives written up and initiatives were implemented so as to ensure that the Bank does not experience any financial crises in the near future. The Bank’s approach is to ensure that there is an effective risk management culture at all times. The Bank constantly reviews the policies in place for risk management so as to certify that it is not susceptible to large asset and property valuation. This is what makes the bank unique.
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