Annual Report and Accounts 2004 - National Bank of Kuwait

Credit growth moderated somewhat during 2004to 16% from last year’s 23%, with total outstandingdomestic facilities reaching KD 9.81 billion (US$33.3 billion). Personal facilities continued todominate growth in credit, having risen by 17%,while lending to the trade sector was only slightlybehind in volume, though it was the fastestgrowing at a rate of 31%. Loans to the real estatesector continued to see healthy growth of 12%.Growth in salary-based loans to consumers slowednotably from a fast pace in recent years, followinga CBK directive scaling back maturities for newloans and effectively lowering the amount that aborrower can borrow on a given salary. AnotherCBK directive limiting the use of back-to-backinterbank loans to increase their consumer lendingceiling also contributed to reducing salary-relatedcredit during the second half of the year, as did therecent rise in interest rates. Still, such loansaccounted for 10% of the growth in domestic creditduring the first nine months of the year, andrepresented 25% of total outstanding facilities.The redemption of outstanding Debt PurchaseBonds (DPBs) continued with the balance held bybanks falling by KD 215 million. Banks continuedto hold KD 604 million in DPBs on their books atthe end of 2004, representing 3.2% of totalbank assets.Liquid assets of banks, comprising cash, depositswith the CBK and public debt instruments, fell by9.1%. The decline was largely the result of a continueddrop in time deposits with the CBK. At theend of 2004, liquid assets as defined above represented13.2% of total bank assets, versus 14.8%at the end of 2003 and 21% at the end of 2002.Following a period of declining and low interest rates lasting some four years,the CBK began lifting its benchmark discount rate starting on July 1st. By theend of 2004 the CBK had hiked its discount rate five times, by a total of oneand a half percentage points to 4.75%. The CBK’s actions mostly followedsimilar moves by the US Fed. The rise in the discount rate has been followedby increases in deposit rates. This is reflected in the rise in the semi-annualinterest rate paid by the government to local banks on its outstanding DPBs,where this rate has normally matched the average cost of local currencydeposits. The rate was set at 1.88% for the December payment compared to1.76% in June. Lending rates also moved higher with the discount rate, as mostloans in Kuwait are extended on a variable rate basis.Interest rate policy in Kuwait is dictated by an exchange rate regime thatpegs the dinar to the US dollar within a narrow band. However, theexchange rate remained fixed throughout 2004 at KD 0.2947 per dollar. Thedepreciation in the dollar, and thus in the Kuwaiti dinar, relative to majorcurrencies helped raise inflation in 2004, though it remains relatively low.The November consumer price index was 1.8% higher from a year agoversus an increase of 1.2% in 2003.Banking and financial sectorA strong domestic economy, higher lending volumes and rising interest ratesprovided a solid boost to the profitability of Kuwaiti banks. Consolidated profitsof the country’s nine banks were up 23% during the first nine months of 2004.While earnings growth came largely from net interest income, fees andcommissions also saw healthy growth.Banks have been consistently the most profitable sector among locally listedcompanies, contributing 28% of total reported earnings in 2004. As a whole,listed companies saw earnings growth slow down to 12% during the firstnine months of 2004 compared to a 92% rise in 2003. Still, the rise inearnings, coupled with improved business prospects, kept investors bullishon local stocks.The Kuwait Stock Exchange (KSE), among the best-performing markets in 2003,sustained its rally in 2004 albeit at a more moderate pace. The general marketindex rose by 34% versus 102% in 2003, while the value weighted index roseby a smaller 15%. Market capitalisation rose by 23% to KD 21.5 billion (US$73 billion), or roughly 140% of our GDP forecast for the year. Of the KD 3.7billion increase in market capitalisation, KD 1.4 billion came from the listingof 18 new companies. Trading activity was down slightly from last year, thoughit remained relatively high. The market price-to-earnings (P/E) ratio declinedto 13.5 from 14.7 at end-2003, using 12-month trailing earnings.29