Annual Report 2003 - National Bank of Kuwait

Annual Report and Accounts 2003

His Highness Sheikh Jaber
Al-Ahmad Al-Jaber Al-Sabah
Emir of the State of Kuwait
His Highness Sheikh Saad
Al-Abdullah Al-Salem Al-Sabah
Crown Prince of the
State of Kuwait
His Excellency Sheikh Sabah
Al-Ahmad Al-Jaber Al-Sabah
Prime Minister of the
State of Kuwait
Contents
2 Board of Directors
4 Chairman’s Message
8 Review of Activities
19 Economic Developments in Kuwait
25 Financial Statements and Auditors’ Report
52 Group Directory

Our Vision
To be the premier Arab bank
To achieve consistently superior returns for our shareholders
To deliver world class products and services to our customers
To invest in people
To benefit the communities in which we operate
During 2003, NBK moved closer to
achieving its vision, posting record
profitability and growth, and achieving
improved performance in all areas of
operations, both at home and abroad.

Board of Directors
Mohammed Abdul Rahman Al Bahar
Chairman
Nasser Musaed Abdullah Al Sayer
Deputy Chairman
Yacoub Yousef Al Hamad
Member
Hamad Abdul Aziz Al Sager
Member
Nasser Mohammed Abdul Mohsin Al Kharafi
Member
Mohammed Sulaiman Al Sayed Ali Al Rifai
Member
Ghassan Ahmed Saoud Al Khalid
Member
Yacoub Yousef Al Fulaij
Member
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2
3
6
4
5
7 8
1 Mohammed Abdul Rahman Al Bahar
2 Nasser Musaed Abdullah Al Sayer
3 Yacoub Yousef Al Hamad
4 Hamad Abdul Aziz Al Sager
5 Nasser Mohammed Abdul Mohsin Al Kharafi
6 Mohammed Sulaiman Al Sayed Ali Al Rifai
7 Ghassan Ahmed Saoud Al Khalid
8 Yacoub Yousef Al Fulaij
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Chairman’s Message
Mohammed Abdul Rahman Al-Bahar
Chairman
NBK’s performance during 2003 was outstanding.
We generated record results and enhanced the
Bank’s leadership in all business segments, while
staying focused on our strategy.We pursued growth
opportunities while maintaining our discipline in
managing risk and cost and, at the same time, taking
bold steps to ensure growth can be sustained in
the future. Among these steps were a number of
initiatives to solidify our fundamental strengths, and
to continue building upon NBK’s strong brand
equity and reputation as the bank that customers
know and trust to meet their diverse financial
needs with the highest standards of integrity.
Reaffirming our vision and values
In a year in which governance, integrity, and values
were under close scrutiny worldwide, NBK continued
to flourish, just as it did for over half a century,
passionately committed to delivering superior value
to shareholders, customers, and the community, with
whom our relationship is defined by trust and integrity.
At NBK, we are committed to the highest standards
of corporate governance, starting with a well balanced
and active Board that exercises strong oversight on
an independent management team; transparency and
accountability at all levels of the organisation; and
above all, moral and ethical conduct fostered by a
culture that holds trust as the basis for everything
we do. In short, we have and shall remain a good
corporate citizen, fulfilling its social responsibilities
while delivering value to all stakeholders.
The NBK vision summarises our aspiration to be
the premier Arab bank.This entails an unrelenting
focus on growth, performance, and continuous
improvement. Our efforts, achievements and
initiatives this past year were a direct manifestation
of this focus, and have placed us in an ever better
position to realise our vision.
Performance driven
NBK’s record of consistent growth in profitability
since its inception in 1952 is one manifestation of
our performance driven culture. We are proud of
this record and of the superior returns generated
to shareholders that place NBK not only among the
top performing banks in the region, but also among
leading international banks and financial institutions.
We maintained this record in 2003, during which the
Group’s net profit rose by 14.3 percent to KD 121.3
million (US$ 412.0 million), a new record for NBK.
Earnings per share rose to 82 fils compared to 72 fils,
and return on equity increased to 27.7 percent.
I am also pleased to announce that the Board of
Directors has proposed to the General Assembly
payment of a cash dividend of 50 percent of the
nominal value of shares outstanding, up to the date
of the General Assembly meeting, in addition to
raising the Bank’s paid-up capital by 5 percent
through the issuance of bonus shares.
These financial results confirm our success, as does
our performance relative to the competition, and so
do our financial strength ratings that stand highest
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NBK’s record of consistent growth in profitability since inception
in 1952 is one manifestation of our performance driven culture.
among all emerging market banks. During 2003,
Standard & Poor’s raised our long-term credit rating
to ‘A’, based on our strong financial profile, prudent
risk management practices and healthy profitability.
Other leading international rating agencies, including
Moody’s and FitchRatings, maintained their top
ratings for NBK.
Growth with discipline
Our performance in 2003 comes against a backdrop
of a tenuous global recovery, with interest rates
remaining at 45-year lows and keeping pressure on
interest margins. NBK’s challenge was to expand
business volume and increase non-interest income.
The opportunity was presented by positive domestic
fundamentals, coupled with rapid change in the
region’s geopolitical environment, which quickly
switched from being a source of uncertainty to one
full of promise for future growth and stability.
The winds of change in the region were quickly
reflected in the pace of local activity, with investment,
spending and cross-border transactions increasing
dramatically.This proved to be a boon for NBK’s
corporate and investment banking businesses, given
our capabilities and pricing power. Ballooning trade,
as reflected in oil exports, domestic imports and
re-exports to Iraq allowed us to apply our distinctive
skills in trade finance. A buoyant local stock market
and the comeback in international markets provided
considerable opportunities in the private banking and
wealth management areas.The impact on household
income and consumer spending, which also benefited
from strong demographic trends, helped NBK
capitalise on its leadership in retail banking, specifically
in consumer credit business.
The positive business environment provided us with
many opportunities to exploit our fundamental
strengths. Our strategy of focusing on customers,
anticipating their needs, and offering innovative and
integrated financial solutions made it possible for us
to increase our penetration of profitable segments
and to deepen our relationship with valuable
customers.We also remained faithful to our discipline
of balancing risks against rewards and controlling
costs. Our prudent risk and cost management culture
has been tested over time and proved to be a source
of strength that we are committed to maintain.
Regional expansion
NBK’s focus on meeting customer needs has been
one of the drivers behind our geographic expansion
strategy. NBK has long had a focused presence
in the major international centres.The currency
focus is on strengthening our presence within the
region to support corporate customers’ expansion
plans.This will also allow us to exploit growth
opportunities in markets where we can leverage
our competitive advantage.
To this end, we have opened a full-service onshore
bank in Bahrain alongside our offshore branch there.
Preparatory steps were made to open a new branch
in Jordan, followed by one in Saudi Arabia. We are
also making efforts to enter Qatar, Iraq and other
5

Chairman’s Message
markets. Meanwhile, as part of the winning
consortium that has recently started operating the
Trade Bank of Iraq, we hope to support the activities
of our Kuwaiti customers in this promising market.
Beyond our region, yet still within a major trade zone
for Kuwait, Singapore’s monetary authorities upgraded
NBK’s offshore licence to a wholesale banking unit.
The Singapore branch will continue to serve as a hub
for NBK’s activities in Asia and the Pacific.
Striving to improve ourselves
To maintain NBK’s edge and further strengthen
our competitive advantage, we took a critical look
inside the Bank this year to identify opportunities
for improvement. Our review covered the various
businesses, technologies, processes and people.
On the business side, we reviewed the Bank’s strategy
based on in-depth analysis of markets and customers,
utilising the unique knowledge we have accumulated
over many years. We identified a number of key
strategic initiatives that will drive NBK’s growth over
the long-term and determined how these should be
implemented. Several initiatives have already been
launched and we expect positive results as early as
next year not only in financial terms, but also through
other key performance indicators.
On the technology side, we examined the fit between
NBK’s business strategy and information technology
to ensure we have the right match. We inititated a
number of projects designed to improve efficiency
and maintain the Bank’s technological edge.
NBK’s commitment to continuous improvement is
based on the belief that how we do things is as
important as what we do. A program was initiated
to identify ways of improving efficiency at all levels
of the organisation.This included performance
management systems that will foster better alignment
between individual initiatives and the Bank’s overall
strategic vision.
How we execute these various initiatives will
ultimately determine the long-term results.We have
great faith in our senior management team that is
considerably experienced in managing change and in
leading the organisation towards becoming a worldclass
financial services provider.This strong and stable
team has demonstrated its ability over time, and
much credit is due to its members for the Bank’s
superior performance. Indeed, it is one of the pillars
of strength at NBK, which renews our confidence in
our ability to realise our full potential and to create
enduring shareholder value.
Social responsibility
The welfare and development of our community
are integral elements of the NBK values. Our size
and standing in the local market also make this an
important social responsibility.The Bank’s community
programs provide support to various charitable,
cultural, social and athletic activities. However, this
is only one facet of our commitment to benefit
the communities in which we operate.
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We identified a number of key strategic initiatives that will
drive NBK’s growth over the long-term and determined how
these should be implemented.
This year, NBK gave special attention to supporting
the elderly.The proceeds of an annual charitable
campaign held during the Holy month of Ramadan
were donated to a home for the aged established by
the Ministry of Labor and Social Affairs. In the past,
such campaigns have focused on the health and
welfare of children, the elderly and the disabled, who
we continue to support through various other
activities, including the specialised children’s hospital
built at the Bank’s own expense and donated to the
Ministry of Health three years ago.
With appreciation
In conclusion, and on behalf of the Board of Directors,
I would like to express our sincere gratitude and
appreciation to His Highness the Emir Sheikh Jaber
Al-Ahmad Al-Jaber Al-Sabah, His Highness the Crown
Prince Sheikh Saad Al-Abdullah Al-Salem Al-Sabah, His
Excellency the Prime Minister Sheikh Sabah Al-Ahmad
Al-Jaber Al-Sabah, and to members of the Council of
Ministers and National Assembly, for their wise
management of the nation’s economic policies.
Our appreciation also goes to our shareholders for
their continued support and confidence, which have
been invaluable for NBK’s growth and development.
We are particularly grateful to our customers for
their trust and loyalty, and we assure them of our
unfailing commitment to uphold the NBK promise
of high quality and convenient services that meet,
or exceed, their needs.
In closing, we thank and acknowledge our employees,
who never waver in their commitment to NBK and
its mission, and whose tireless efforts stand behind
our successes and outstanding results. Without any
doubt, our management team is the most talented
and our people’s integrity, innovation, teamwork and
commitment give me tremendous confidence in our
ability to meet the challenges that lie ahead.
Mohammed Abdul Rahman Al-Bahar
Chairman
We also thank the Central Bank of Kuwait for its
prudent management of monetary policy and oversight
of the financial sector, and to the Ministry of Finance,
the Ministry of Commerce and Industry, the Chamber
of Commerce and Industry, and all government
departments and agencies, for their cooperation
with the banking and financial sector of Kuwait.
7

Review of Activities
During 2003, NBK successfully leveraged its
expertise, technology, financial strength and strong
relationship with customers to solidify its leading
market position and to continue its evolution into a
premier financial services supermarket in the Arab
world, able to compete effectively with global banks.
In each of its activities, the Bank follows best
practices and offers best-of-breed products
and services that meet the financial needs of its
customers.The markets we serve in the region have
also been expanded giving us greater ability to
remain close to our customers as they expand, as
well as spread our reach into these new markets.
Consumer Banking
The customer comes first…
A customer-centric strategy continued to define the
operations of the Consumer Banking Group.The
Bank has succeeded in building customer loyalty by
diligently meeting the needs of distinct customer
segments, offering them the widest range of products
and quality services in a convenient manner. In this
pursuit, leading-edge technology has played a central
role, providing us with the right tools to identify
customer needs accurately and enhancing our
distribution with an array of automated delivery
channels which complement the largest branch
network in Kuwait.
Responding to customer needs requires that we
focus on serving them through the different stages
in their lives. Main events such as graduation, car
and home purchase, marriage, planning for children’s
education and retirement require products designed
to meet a specific need. Our personalised services
and customised product offerings cater to the needs
of all segments of the population from the most
established high-net worth customers to young
children who constitute our future customer base.
The Bank offers young customers specialised services
through Zeina for children and Al Azraq for teens,
allowing them to open their first bank account and
obtain benefits such as reward points, discounts at
key stores in Kuwait, and internet access. Mustaqbal
offers young university graduates starting their first
job a package of services geared to their needs, such
as an ATM card, special loans and discount credit
cards. Affluent customers receive the special service
of a Personal Banking Officer to provide them with
the attention they require to manage their finances.
Officers are trained to advise customers on wealth
management strategies and ensure that they are well
positioned financially for their future.
At NBK, customer loyalty is built on providing quality
of service that is superior. For the past seven years,
the service quality program has ensured NBK’s
leadership in the local market through its systematic
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Relationship staff at branches and in the
Call Centre are highly trained and motivated
to serve customers to the highest standards.
benchmarking of service quality. Relationship staff in
branches and in the Call Centre are highly trained and
motivated to serve customers according to the highest
standards and are evaluated by internal and external
auditors to ensure they meet these standards.
To ensure we always provide the best service
possible to our customers, the Bank continues to
develop its Customer Relationship Management
(CRM) system.The system allows our staff to
deploy state-of-the-art technology to optimise their
interaction with customers across all channels. Staff
can tap the CRM to gain insight about each customer
to provide the best advice on key services and on
managing their finances effectively.
NBK offers the widest range of products and services
in the country from traditional deposit accounts and
loan packages to credit cards and a full range of
mutual funds and insurance products. Our loans
address the needs of Kuwaiti nationals as well as a
large number of working expatriates.
The Bank has also succeeded in promoting its credit
cards through the successful Watani Gifts rewards
program that is tied to card usage, allowing the
Bank to differentiate its offering and build customer
value and loyalty.
NBK continued to give a high priority to developing
its network of branches and other delivery channels.
Through upgrading, use of state-of-the-art technology
and outsourcing we ensure our ability to leverage
the latest advances in all aspects of our operations,
communication and provision of service to customers.
This year, the Call Centre received a complete
system upgrade using cutting edge technology. NBK’s
telephone banking service is now available 24 hours
a day, every day of the year – a first in Kuwait.
NBK has often been the first to introduce innovative
products in the market, such as the first chip-enabled
Smart Card in Kuwait, expanding the usage of debit
cards to enable online purchases on NBK’s website,
and establishing a bill payment program with the
leading mobile telecommunication provider.
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Review of Activities
Corporate Banking
Creative and integrated services…
NBK has maintained its leadership in providing
banking services to companies doing business in
Kuwait. Both domestic and international businesses
appreciate the sophisticated and integrated services
we offer. We have built a strong franchise in this
market by maintaining solid relationships with leading
corporate customers, large oil corporations,
government agencies, investment houses and other
institutional clients. Our strength in this arena is
further enhanced by our ability to anticipate and
meet our customers’ banking needs.
Our ongoing strategy is to direct our efforts and
resources to deliver exceptional service and superior
value to clients while maintaining high asset quality.
Careful execution of this strategy has enabled the
Group to achieve aggressive targets of revenue
growth and cost control.This helped enhance our
already strong position in the corporate lending
market where we hold the largest portfolio of
corporate debt in Kuwait.
The Corporate Banking Group responded
successfully to challenges stemming from geopolitical
instability in the region, and succeeded in achieving
its aggressive targets of revenue growth, cost control
and maintaining NBK’s superior market position. We
maintained our ongoing strategy to exert every effort
and direct all resources to delivering top class service
and high value to our corporate customers while
maintaining high asset quality.
International companies doing business in Kuwait
continue to choose NBK over other banks for their
local banking needs, ensuring our overwhelming
dominance in the sector.The Bank’s leadership
position can be attributed to our proven ability to
provide real value to international corporates with
tailor-made financing packages. Adherence to the
highest professional standards, our strong corporate
relationships, and our international presence helped
the foreign corporate unit win the business for almost
all public sector contracts awarded to international
companies during the year.
Trade finance activity saw unprecedented growth
during 2003 with gross turnover increasing by 40
percent. A number of mega transactions had a
marked impact as did the increased trade volume
seen with Iraq.The resumption of trade with Iraq
following the demise of the former regime ensured
significant growth in letters of credit.
In 2003, NBK was part of a consortium of
international banks selected by the Coalition
Provisional Authority and the Governing Council of
Iraq to manage the new Trade Bank of Iraq. NBK’s
role in the consortium was key to winning the award,
owing to our substantial experience in the region
and the volume of our business in the market.
Our innovative electronic banking service for
businesses, Watani Online Corporate (WOLC),
continues to differentiate NBK in the local market
and reflects our leadership in the use of technology.
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The service provides us with a clear advantage
in serving large institutions with special cash
management needs.
Wealth Management
Customised solutions…
NBK maintained a unique and leading position in
wealth management, achieving growth in our key
businesses and implementing bold initiatives intended
to enhance our competitive edge in order to take
full advantage of growth opportunities. Wealth
management includes two major business lines: Private
Banking, and Asset Management. Integrated teams of
skilled professionals from both areas work together
to help individual customers with their specific needs.
Private Banking extends a comprehensive range of
banking and investment products and services to a
broad customer base of high net-worth individuals
and families. We have long-standing relationships that
span generations. Our focus is to understand and
satisfy our customers’ varied financial needs through
superior service and competitive long-term returns.
Our success starts with a solid personal relationship
between our private banking officer and each
customer.This is complemented by a full range of
integrated private banking facilities, investment and
portfolio management, mutual funds, private equity,
trust services, real estate finance and services, credit
and investment finance, customised banking and
advisory services.
Our highly trained and experienced officers are
dedicated to devising solutions that meet their
customers’ short and long-term investment targets.
Officers use state-of-the-art tools to design unique
investment strategies and asset allocation based on
each customer’s individual risk tolerance and
performance targets.
NBK’s edge lies in its proximity to local customers.
Our clients are served in an air of confidentiality and
professionalism at our head office, a select number
of local branches and our extensive international
network located in the world’s major financial centres.
The network includes a wholly-owned Geneva-based
subsidiary, National Bank of Kuwait (Suisse), that is
positioned to offer customers the confidentiality and
security characterising Swiss banking, and more. In
addition to offering convenience, our network allows
NBK to compete on a global level with some of
the world’s largest and well-established banks.
NBK’s asset management business focuses on
providing our customers with advice and management
of their assets to ensure that they achieve their
financial objectives. Wealth management services are
delivered through three subsidiaries, each focused
on and dedicated to meeting the needs of different
investor groups.The three business units are steadfast
in their mission to offer high net-worth, institutional
and retail customers a broad range of investment
products and services including personalised wealth
management services, separately-managed accounts,
mutual funds and Islamic funds.
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National Bank of Kuwait (Suisse) SA, based in Geneva
is NBK’s wholly-owned private banking subsidiary that
caters to the needs of high net-worth individuals and
wealthy families. NBK Suisse achieved outstanding
results in 2003, despite the challenging market
environment, offering a broad range of high quality
portfolio management services, advisory services,
custodianship, family trusts and foundations.
NBK Investment Management Ltd (NBKIM), based in
London serves the needs of institutional investors
based on discretionary investment mandates.This
joint venture with Morgan Stanley has produced good
results for its clients as most managed portfolios have
outperformed their respective benchmarks.
NBK Global Asset Management (NBK GAM) offers
our domestic retail investors a wide range of mutual
funds and Islamic funds.The Watani & Al-Kawthar
Islamic families of funds span most asset classes
including global equities and bonds, money-market
funds in Kuwaiti dinars, US dollars and Euros, an Islamic
leasing (Ijara) fund, a hedge fund, principal guaranteed
as well as US and European real estate funds.
A major addition to our value added services during
2003 was the introduction of the Fundselect
program. Fundselect is an “open architecture
platform” that offers our customers access to top
performing investment managers and world-class
investment expertise, within a framework tailored to
customers’ particular investment needs. Fundselect
products combine the unparalleled fund research
capabilities of Standard & Poor’s and the asset
allocation, portfolio construction and performance
measurement skills of the UK-based Schroders
Investment Management Company to deliver best-ofbreed
products to our clients. NBK is the only
institution in the Middle East and one of a handful of
global financial institutions to offer such investment
services to its clients.
Investment Banking
Universal services…
NBK is a leading player in the provision of investment
banking services in the region, leveraging its expertise
and financial strength to achieve superior results for
clients. We offer a comprehensive range of corporate
finance and financial advisory services for companies
in Kuwait and across the Middle East. Our services
span the spectrum from advising and underwriting to
lead managing and arranging a number of the largest
deals in the Middle East. In 2003, Euromoney
Magazine recognised NBK as the Best Mergers and
Acquisitions (M&A) House in Kuwait.
The year 2003 was a busy one. In January, NBK acted
as sole financial advisor to MTC-Vodafone in its
acquisition of a 91.6 percent equity interest in Jordan
Mobile Telephone Services Company Ltd. (Fastlink)
for $423.9 million.The acquisition of Fastlink marked
MTC-Vodafone’s first move in its regional expansion
plans.The company chose NBK as its strategic
partner in the implementation of this strategy.
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Review of Activities
In 2003, Euromoney Magazine recognised NBK as the
Best Mergers and Acquisitions House in Kuwait.
With NBK leading the acquisition process on behalf
of MTC-Vodafone, the Bank demonstrated its ability
to successfully execute large M&A deals with
effectiveness and efficiency.The transaction was the
largest-ever equity acquisition in the Arab world
and was by far the largest private sector investment
venture in Jordan by a corporation from the Gulf
Cooperation Council (GCC) .
In April, NBK also acted as sole financial advisor to
MTC-Vodafone in its successful bid for the second
mobile licence in the Kingdom of Bahrain. NBK led
the licence application process and the negotiations
with the Bahraini authorities.The licence was granted
to MTC-Vodafone Bahrain, a subsidiary of MTC-
Vodafone. Bahraini authorities had received ten
applications for the licence from international and
regional applicants.
In September, NBK acted again as sole financial
advisor to MTC-Vodafone, this time in its successful
bid for one of the three mobile licences offered by
the Coalition Provisional Authority in Iraq. NBK led
the application and negotiation process on behalf
of MTC-Vodafone.
In October, NBK advised Kuwait Investment Authority
(KIA) on the disposal of a 49 percent equity interest
in Sassoon Holdings Pte Ltd, a financial brokerage
company based in Singapore with operations in the
Far East and Western Europe. NBK led the process
and negotiations with the buyer on behalf of KIA, and
executed the transaction in a seamless manner.
Internet and e.Business
Superior service through leading technology…
NBK maintains its lead position in the Internet and
mobile commerce and banking arenas. Our success
is due to NBK embracing the Internet and other
technologies as more than just an alternative delivery
channel. We understand that such technologies are
a completely different way of providing financial
services to customers. We have made a commitment
to deliver value added services, customer convenience
and security by leveraging state-of-the-art technologies.
In 2003, NBK’s pioneering online presence has earned
us the award of Best Internet Bank in Kuwait and the
Middle East by Global Finance.
Our online banking offering, Watani Online, was
completely revamped during the year. Changes
brought a new look and feel, improved functionality
and personalisation functions. Customers are now
able to create their personal profile, ‘MyWOL’,
enabling them to customise their homepage to better
serve their banking and financial needs. NBK was the
first bank in Kuwait and the region to offer such
personalisation features in its online banking offering.
These initiatives have helped increase Watani Online
users to over 70,000, with the service representing
7 percent of the Bank’s delivery mix. WOL continues
to grow at a rapid pace with transactions rising at an
average of 8 percent a month.
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Review of Activities
Our success is due to NBK embracing the
Internet and other technologies as more than
just an alternative delivery channel.
During the year, NBK’s Watani Online service was
enhanced to enable customers to better manage
their finances. In addition to traditional enquiry and
international transfer services, our bill payment
infrastructure makes NBK the leader in bill payment
services.Through a number of strategic partnerships,
NBK customers can use our on-line channel with its
advanced payment infrastructure to pay utility and
phone bills, mobile telephone bills, book and purchase
movie tickets, and pay school tuition fees.
We are also currently upgrading our online bill
payment infrastructure to comply with the rules and
regulations of Visa. As a result of this upgrade NBK
will be the only financial institution in Kuwait and
among a few in the region complying with Visa’s
highest standards, ensuring our customers have the
most secure and reliable online and mobile payment
services possible.
The past year saw the Bank’s bilingual website,
www.nbk.com, transformed into a mini-portal providing
users with banking as well as general content based
on customer feedback.The website, which serves as
the gateway to all our online services, can be
personalised by allowing customers to create their
own “MYNBK.com”.The website continues to be a
successful medium for communicating NBK news and
events to visitors through banners and emails. NBK
uses targeted emails to send advertisements and
newsletters, keeping customers informed of new
services, promotions and special events.
The Bank continues to capitalise on the potential of
our SMS service, NBK Mobile, to promote products
and services to targeted groups of customers, in
addition to providing them with financial alerts.This
service, along with our other internet and e.business
initiatives, demonstrate NBK’s commitment to
embracing state-of-the-art technologies to provide
customers with the utmost convenience in handling
their financial affairs.
International Banking
Focused expansion…
NBK’s international presence is a key asset allowing
us to provide comprehensive financial services to our
customers, from corporations and business people to
wealthy individuals and those who travel frequently.
The NBK Group international network includes
National Bank of Kuwait (International) PLC, based
in London and Paris, National Bank of Kuwait (Suisse)
in Geneva, and National Bank of Kuwait (Lebanon)
SAL in Beirut, in addition to branches in New York,
Singapore and Bahrain, and associated representative
offices in Bangkok and Ho Chi Minh City.
The Bank is proceeding with plans to expand in the
region. During 2003, we opened an onshore
commercial branch in Bahrain, which complements
our existing offshore banking unit. Preparatory steps
are being taken to open branches in Jordan and Saudi
Arabia during the first and third quarters of 2004,
respectively.These branches will provide a full range
of banking services to our customer base serving the
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corporate, institutional and private investors, and will
complement the Bank’s existing international network.
A full range of corporate, treasury, trade finance,
retail and private banking services are provided by
the International Banking Group. We pay particular
attention to the needs of the Bank’s traditional
customer base of exporters and contracting
companies involved in the public and private sectors
in Kuwait and the Gulf. Within the treasury and
foreign exchange markets, we continue to pursue
a policy of conservative risk management, with a
particular focus on servicing clients in the Middle East.
Highlights of our international operations were
as follows:
• The tentative global recovery provided the
opportunity to undertake a number of select
transactions in our international credit portfolio,
while maintaining the overall emphasis on diversifying
exposures in terms of counter-parties, sectors,
economies and regions.
• Real estate advisory services are provided by our
New York, London, Paris and Lebanon offices.The
New York office also acts as a consultant to the real
estate fund recently launched in Kuwait. Due to
increased demand by Kuwaiti customers related to
the acquisition or financing of residential real estate
in Lebanon, the Bank’s Lebanon subsidiary has
become particularly active in this area.
• NBK’s contract support package, provided by a
team of professionals in London, New York, Paris and
Singapore, was made available to our Western and
Asian contracting customers who continued to be
active in Kuwait throughout the year. Our New York
branch also worked closely with US contractors
providing them with financial services to support
their rebuilding activities in Iraq.
• NBK (International) in London maintained a
strong focus on providing support to customers
involved in contracts and projects in Kuwait and the
region.These core activities, combined with a well
diversified lending business, provided stable and
growing income against the backdrop of economic
and political uncertainty.
• Our International Banking Group’s treasury team
continued to provide the highest quality service to our
relationship clients, resulting in volume growth through
positive referrals.The Bank has continued to manage
risks under a conservative framework, with a limited
reliance on speculative positions, and within strictly
defined and maintained risk parameters for such
exposures. Such a disciplined approach protected the
Bank from adverse market events throughout 2003.
As a result, the treasury continued to be a significant
contributor to the Bank’s overall profitability.
15

Review of Activities
• The Bank’s New York office increased its US dollar
clearing business during the year and is on track to
surpass last year’s record, transferring in excess of
$2 billion daily from a client base consisting of
government agencies, investment companies, financial
institutions, oil companies and banks throughout the
Arab world. WITSWEB, introduced two years ago as
an online banking product for corporate clients who
need secure communications over the Internet, has
been successfully adopted by all our clients and
enabled the branch to attract new accounts from
Gulf-based businesses.
• During the year Lebanon saw an increased
number of Kuwaitis visiting the country, particularly
during the summer period. Working hours were
extended in some branches to accommodate
customer requirements. With its nine branches
located in popular tourist and commercial areas, the
Lebanon operation is geared to provide superior
service to Kuwaiti and Lebanese customers, offering
a full range of banking services to suit their needs.
• The Bahrain offshore banking unit continued to
provide a full range of Treasury and wholesale banking
services to a broad customer base throughout the
Middle East and North Africa. During the year the
branch selectively participated as lead manager in
several syndications, FRNs and bond offerings in both
primary and secondary markets.
• The Bahrain retail branch opened in August 2003
to provide a full range of retail and corporate banking
services to domestic clients as well as Kuwaiti investors,
corporates and tourists. Since opening, the branch has
provided loans to corporate and high net-worth
clients and trade finance business.
• The Singapore branch, supported by representative
offices in Thailand and Vietnam, continued to provide
a full range of wholesale banking products to the
Bank’s customers, including a 24-hour Treasury
service. In May 2003 the Monetary Authority of
Singapore, as part of its banking liberalisation
program, upgraded eight Offshore Banks including
NBK SAK Singapore to Wholesale Banking status.
The banks were assessed on several criteria, including
financial strength, contributions and commitment to
developing Singapore’s financial sector.
• NBK Group’s customers find London and Paris
convenient and secure locations for deposits, whether
for expenses when travelling in Europe or for longerterm
investment security.
Treasury
Leading market maker…
NBK is an important player in the local money and
foreign exchange markets.The Bank’s treasury division
plays the role of market maker for the Kuwaiti dinar
both domestically and internationally. In the local
interbank money market NBK is a net lender providing
other local banks with cash management facilities for
their short-term and medium-term cash flow needs.
16

The treasury division works closely with other
areas in the Bank, including our international
branches in the world’s major financial centres.
The Bank offers a wide range of treasury, asset and
liquidity management services to our customers.The
treasury division works closely with other areas in
the Bank, including our international branches in the
world’s major financial centres, providing innovative
and cost effective solutions to corporate and
institutional customers.
Risk Management
Discipline and prudence…
Efficient risk management is a core discipline of NBK
to maintain its stability and quality of assets.The
comprehensive global risk management framework
adopted by the Bank has continued to evolve in light
of the Group’s expanding activities, and has once again
proven its effectiveness.This framework is designed
to produce an accurate and timely evaluation of the
Bank’s risk exposure in addition to ensuring risk is
effectively controlled and mitigated.The system allows
NBK to manage firm-wide exposure to credit, market,
liquidity and operational risks.
Credit risk management at the Bank is based on two
tenets: “focused diversification” and “prudent lending”.
The Domestic and International Credit Control
Divisions constantly monitor the quality of the Bank’s
credit portfolio and ensure the Bank’s adherence to
the strictest credit policies.This has enabled NBK to
maintain the highest asset quality.
The Bank’s exposure to market risk is managed by
the Asset and Liability Executive Committee. Market
risk arises from the mismatch between assets and
liabilities.This mainly occurs in the non-traded banking
book, and is actively managed by employing a number
of non-statistical market risk management techniques
including various position and sensitivity limits.The
Bank supplements this approach by using an internal
model to statistically measure and analyse the valueat-risk
(VAR) arising from movements in various
market prices.The process is also supported by stress
testing to simulate the effects of potential extreme
market movements under a number of scenarios.
Liquidity risk is monitored and evaluated on a daily
basis. In addition to ensuring that the Bank’s balance
sheet profile complies with regulatory requirements,
the Treasury Division is actively involved in cash flow
management and in meeting the Bank’s funding needs
at all times.
Management of operational risk also receives high
priority and is controlled by the Bank’s Operational
Risk and Compliance functions. Operational risk is
measured across a number of processes based on
the probability and impact of risks, together with the
potential mitigating effects of controls and insurance.
Formal procedures and internal controls are
continuously improved and streamlined to ensure
their effectiveness without interfering with the
conduct of business.This process is supported by a
strong Internal Audit function, through independent
review, and an Insurance and Risk Financing function.
17

Review of Activities
Potentially extreme events are also evaluated.The
Bank has a sound business resumption plan built on
the foundations of a fully equipped disaster recovery
centre.The centre is tested quarterly to ensure that,
in the event of a disaster disabling our main data
centre, the Bank can restore a complete range of
services within three hours.
Finally, as a component of the overall risk management
of the Bank, anti-money laundering and combating
terrorism financing initiatives are constantly challenged
and reviewed to ascertain full compliance with local
requirements and international best practice. Formal
procedures and mandatory training programs are in
effect. Adherence to procedures is monitored by the
Anti-Money Laundering and Combating Terrorism
Financing Unit, Compliance and Internal Audit Functions.
NBK and the Community
Social responsibility…
At NBK, we recognise that the support and trust we
receive from the community is key to our success.
As such, we are committed to giving back to the
community, through charitable programs, sponsorship
and participation in community activities. We also
encourage our staff to volunteer and participate
actively in social, charitable and athletic activities.
As the future of Kuwait, children have always been
at the heart of our community programs. Our
financial support to the Kuwait Association for Caring
for Hospitalised Children is complemented by special
staff visits to children, elderly and disabled patients in
a number of hospitals and public homes in Kuwait,
especially during the Holy Month of Ramadan. NBK
also continues to support the specialised Children’s
Hospital built at the Bank’s own expense, and
donated to the Ministry of Public Health in 2000.
Education and human development also receive
special attention in our community efforts. In addition
to regular visits by staff to local schools, NBK holds
several summer internship programs for students
to acquaint them with the banking business.
Our efforts are a reflection of our commitment
to NBK’s larger community and our responsibility
to work for its advancement and welfare.
18

Economic Developments in Kuwait
Favourable domestic trends continued to gain momentum,
benefiting from a generally better sense of confidence and
optimism about future prospects.
Growth in business activity became more widespread
in 2003, strengthening demand for banking services.
Higher oil revenues accommodated an increase
in government spending, which acted as the pump
primer for the economy, while other factors served
as growth catalysts.
The rapid conclusion of the war in Iraq cleared the
uncertainties that were clouding the economic
outlook the previous year, quickly dissipating fears
of a possible disruption in the flow of oil or business
activity within Kuwait.To the contrary, lucrative
logistics and supply contracts from foreign military
forces stationed in Kuwait invigorated domestic
demand and business activity.The overthrow of Iraq’s
hostile regime also removed the psychological threat
it posed to Kuwait’s security.This added to a generally
better sense of confidence and optimism about future
business prospects, particularly with the resumption
of trade and commercial relations with Iraq.
The real estate and stock markets were direct
beneficiaries of this increased optimism, with activity
and prices in both markets rising sharply. Low interest
rates and excess liquidity in the banking system
facilitated the flow of investments into these markets.
Oil Revenues and Public Finance
Oil revenues were higher as oil prices remained
strong for most of 2003 and crude oil production
increased.The price of OPEC’s benchmark basket of
crude hovered close to the upper limit targeted
by the organisation and well above the conservative
price assumed in Kuwait’s official budget. Kuwait
export crude (KEC) averaged $27.0 a barrel, 14
percent higher than the previous year; whereas,
crude oil production saw a 19 percent increase.
This ensured a rise in oil revenues of 12 percent
during the first nine months of the fiscal year.
Non-oil revenues were also boosted by higher
customs duties, tax revenues and United Nations
Compensations Committee (UNCC) payments
for losses due to the 1990 Iraqi invasion.
Growth in oil revenues facilitated the government’s
pursuit of an expansionary fiscal policy. Growth in
government spending reached 3.8 percent per annum
during fiscal year 2002/03 and 5.4 percent during the
first nine months of fiscal year 2003/04. Excluding
transfers and non-cash expenses, spending growth
came higher at 8.8 percent and 7.8 percent for the
two periods, respectively.The budget for the current
fiscal year, which ends in March 2004, is expected
to see a surplus as large as the previous fiscal year,
which amounted to KD 1.3 billion, before the
allocation of 10 percent of budget revenues to
the Reserve Fund for Future Generations.
Capital spending continued to be a high priority
in the government’s economic policy. Spending
on development and maintenance projects
increased by 13.5 percent in fiscal year 2002/03,
though it remained well below budget due to
slow implementation and over budgeting.
19

Economic Developments in Kuwait
Non-oil sectors benefited from a surge in activity following
the end of the war in Iraq and the resumption of trade with
the northern neighbour.
Only 70 percent of the budget was spent, in line with
the year before. Growth in government spending has
to a large extent contributed to a rise in gross capital
formation by 7.6 percent in 2002. We estimate that
capital spending this fiscal year will show an increase
as well, given that the budget allocation was raised
by 8 percent.
Though not reflected in the State budget, capital
spending in the oil sector has also been a beneficiary
of increased focus on development projects.The
country’s crude oil production capacity was tested in
the spring during the war in Iraq, when output surged
to its highest level in years.This highlighted the
urgency of increasing the country’s capacity and
improving efficiency. An ambitious capital expenditure
plan is presently being implemented, which includes
expanding export facilities and upgrading gathering
centres and pipelines. In the downstream sector, plans
for two major petrochemicals projects are in the
advanced stage, with at least one approaching
implementation in 2004.
National Income
Strong oil prices and higher production levels will
mean substantial growth in gross domestic product
(GDP) in 2003. Non-oil activities have also witnessed
accelerating growth that could top the 6.6 percent
increase in value added during 2002.This means that
overall growth will be substantial in both nominal and
real terms, since lower crude oil production in 2002
limited the increase in nominal GDP to only 2.3
percent to reach KD 10.7 billion.This drop in crude
output was partially offset by an 11 percent increase
in the average price of oil and a rise in petroleum
refining output as the country’s refining capacity was
restored to its level prior to a June 2000 accident at
the country’s largest refinery.
Non-oil sectors benefited from a surge in activity
following the end of the war in Iraq and the
resumption of trade with the northern neighbour.
Optimism now pervades economic life with a
number of Kuwaiti businesses already moving to
do business in Iraq. Foreign companies vying to do
business in Iraq also started using Kuwait as a base
or transit point, boosting demand for domestic goods
and services.The increased sense of stability in
Kuwait also served to improve the business
environment domestically.
Leading private sector areas that have witnessed an
upturn are wholesale and retail trade, real estate
and business services, manufacturing, transport,
storage and communication, and healthcare.These
sectors were already experiencing an acceleration
in activity during 2002. Unofficial indicators suggest
growth gained momentum on the back of higher
consumer and government spending and Iraq-related
business.The latter could be a bigger boon to
business once the security issue in Iraq is resolved
and reconstruction efforts progress.
20

Kuwait’s current account should show a higher
surplus in 2003 from higher oil and refinery exports.
In 2002, the current account surplus fell by half to
KD 1.3 billion, or 12 percent of GDP, as a result of
reduced oil production and a surge in imports.
Lower investment income from abroad also
contributed to the decline. Stabilisation of interest
rates and a general improvement in global markets
and corporate profits should be reflected in higher
investment income for 2003.
UNCC payments to the private sector (individuals
and companies) provided a smaller stimulus to
domestic activity, liquidity and investment compared
to the previous three years. Payments dropped
significantly in 2003, falling to KD 436 million from
KD 519 million in 2002 and KD 877 million in 2001.
Further reductions are expected in the coming
years following a UN Security Council resolution
reducing the share of Iraqi oil revenues set aside
for compensation from 25 percent to 5 percent to
accommodate the country’s enormous need for
funds to finance reconstruction.
Consumer Spending and Finance
Private consumption expenditures continued to be
propelled by the same factors that were behind their
accelerated growth in 2002, which, at 11 percent, was
the highest since 1996. Increased hiring in both the
public and private sectors helped boost household
spending in general.This was further facilitated by a
rapid expansion in consumer loans, in addition to
demographic trends of a fast growing population and
rapid household formation.The increase in spending
is best reflected by a 24 percent rise in imports (net
of re-exports) during the first three quarters of 2003,
following a 12 percent increase in 2002. Figures for
trade with the US, UK, Japan and Germany point to
a strong increase in vehicle imports.Though some
may be related to Iraq and a rise in trucking business,
a good part has been for local buyers, most of whom
resort to bank loans to finance car purchases.
The economic recovery caused an increase in the
demand for expatriate labour, whose growth could
exceed 7 percent for 2003.Though most of the
growth is among unskilled labourers, an increase
in the number of professionals and teachers was
also seen during the first three quarters of 2003.
Meanwhile, Kuwaitisation and the National Labour
Support Law appear to have made some impact
on Kuwaiti employment over the last year, most
noticeably in managerial and supervisory positions.
Nonetheless, unemployment among Kuwaitis
continues to grow as neither public nor private hiring
can absorb all new entrants into the job market.
21

Economic Developments in Kuwait
In the downstream sector, plans for two major
petrochemicals projects are in the advanced stage, with
at least one approaching implementation in 2004.
Growth in salary-related debt extended by banks
moderated during 2003 to 10.1 percent, compared
to growth of 23.9 percent in 2002.The war in Iraq
may have been partly responsible for this slowdown,
in addition to the start of operations at the credit
bureau, which may have negatively affected the
eligibility of some borrowers.The impact of the
credit bureau appears to be felt mostly by the
smaller finance companies that used to attract
borrowers with higher levels of debt.
Despite a rising debt burden, consumers continue
to enjoy reasonable capacity to borrow, providing
an opportunity for banks to expand this activity.The
main factors driving demand include accelerating
growth in employment of nationals, a steady increase
in households, and a drop in the relative value of
instalments due to lower interest rates and
lengthening of maturities by lenders.
Monetary Developments
Money supply (M2) growth accelerated in 2003,
growing by 7.8 percent to reach KD 10.4 billion
compared to 4.9 percent in 2002. Lending to the
private sector has been an important driver, in
addition to growth in government spending and
Iraq-related inflows, namely spending by foreign
entities using Kuwait as a base for their operations
in Iraq. UNCC payments also made a limited
contribution to growth in the money supply.
However, growth was partly tempered by a pick-up
in outflows from the system, as evidenced by a
decline in net foreign assets of the central bank.The
drop in the central bank’s foreign reserves coincided
with a large increase in merchandise imports.
Private deposits in both local and foreign currencies
enjoyed healthy growth, though the latter increased
by a slightly larger percentage. Foreign currency
deposits grew by 9.6 percent during 2003, accounting
for 12.3 percent of the increase in total private
deposits. Local currency deposits rose by 7.4 percent
during the same period, mostly in the form of sight
deposits, no doubt driven by a sharp increase in
trading activity on the Kuwait Stock Exchange. In
contrast, time deposits were up by only 0.7 percent,
getting no help from low interest rates.
Credit facilities to residents witnessed accelerating
growth, reaching 22 percent during 2003, up from
13.5 percent in 2002. Demand for credit for real
estate purposes and for share trading have been
strong drivers, as has demand by productive sectors
including trade, construction, and services. Over 54
percent of the KD 1.55 billion increase in credit
facilities to residents was in personal facilities, a
quarter of which was in consumer credit.
In line with the rapid increase in credit, total assets of
local banks increased by 10.3 percent in 2003. Liquid
assets in the form of claims on the central bank and
the government dropped by 23 percent, primarily as
22

time deposits placed with the central bank declined
by KD 845 million, in line with the drop in central
bank foreign reserves.The central bank had used the
one month time deposit scheme to absorb excess
liquidity in the system over the previous three years
as the inflow of UNCC payments boosted the money
supply. At the end of the year, liquid assets in the form
of cash, deposits with the central bank and public debt
instruments represented 14.6 percent of total bank
assets, compared to 21 percent at the end of 2002.
The reverse happened with inter-local bank deposits,
which swelled by KD 1.0 billion or 55 percent.
Redemptions of the government’s Debt Purchase
Bonds (DPBs) continued as planned with the
outstanding reduced by KD 188 million through
December. DPBs made up 4.4 percent of total assets
at the end of the year, down from 5.9 percent in
December 2002.The government typically pays a
semi-annual interest payment on these bonds
equivalent to the average cost of local currency
deposits, which was set at 1.89 percent during 2003
compared to 2.67 percent in 2002.
Interest rates remained at historic lows with the
central bank’s discount rate standing at 3.25 percent
throughout 2003. Rates on one year treasury bonds
also remained unchanged at 2.75 percent, while rates
on shorter-tenor treasury instruments tightened
slightly.The average duration of outstanding treasury
instruments grew longer as the central bank replaced
some of the maturing bills with bonds, while leaving
the total balance unchanged from the end of 2002.
Inflation remained low despite a small increase, with
year-on-year growth in the consumer price index
for the twelve months ending September 2003
standing at 1.7 percent versus 0.2 percent a year
earlier. A stable exchange rate regime, prudent
monetary policy and a relatively open economy have
helped ensure consistently low rates of inflation.
At the start of 2003 Kuwait adopted a flexible peg
to the US dollar, after having pegged the dinar to a
basket of major currencies for over 25 years.The
rate against the dollar is allowed to fluctuate within
a 7 percent band.The exchange rate was set at
0.29963 KD/dollar at the beginning of January and
was allowed to drift gradually within the permitted
band to reflect the depreciation in the dollar versus
other major currencies.The exchange rate ended the
year at 0.29475, with the KD appreciating by 1.6
percent during the year.
Local Investments
Low interest rates have made alternative investments
look relatively attractive. Bonds, income-producing
real estate and dividend-paying stocks all faced an
increase in demand as well as prices. Low rates were
not the only factor. Improved business prospects
23

Economic Developments in Kuwait
Low interest rates have made alternative
investments look relatively attractive.
especially pertaining to the Iraq market, in addition to
a rise in corporate profits, made investors bullish on
local stocks. Listed companies reported a 90 percent
increase in their aggregate profits for the first nine
months of 2003 compared to the same period in 2002.
The general market index of the Kuwait Stock
Exchange (KSE) advanced by 102 percent, while
market capitalisation rose by 71 percent.Trading
activity also rocketed upwards, with the value of
traded shares up by 143 percent, raising turnover
relative to market capitalisation to 93 percent. As
a result, the market price-to-earnings (PE) ratio, using
year-end prices and twelve-month trailing earnings
through September, reached 18.4 compared to
16.7 at the end of 2002.
Activity in the real estate market increased during
2003 with rising sales, building permits and bank
lending to that sector. While sales and permits data
registered a slight dip in the second quarter due to
the war in Iraq, growth remained mostly positive
during the first half. Permits were up by an annualised
3.5 percent during the first half of the year following
a rise of 19 percent in 2002.
The value of sales was up 3 percent following a
56 percent increase in 2002. Bank loans to the real
estate sector rose by 12 percent during 2003 versus
an 11 percent increase in 2002.
Economic Reforms
In 2003, the government enacted new implementing
regulations governing the foreign direct investment
(FDI) law that was passed two years earlier.The rules
will open the way for foreign capital and know-how
to make critical investments in the country, benefiting
from a 10-year tax holiday and 100 percent
ownership. However, for serious long-term investors
tax reform remains essential.The government has
drafted a law reducing corporate taxes from their
current high level, but the proposal has yet to be
discussed by the National Assembly. In addition, the
government has also drafted a personal income tax
law which envisions imposing income taxes on all
residents. Despite the strong rationale for such a law,
it is doubtful to make it through a populist parliament.
24