Burgan Bank’s Strategy: “Regional Growth & Strong Balance Sheet”

Kuwait’s former Central Bank Governor Sheikh Salem Abdul Aziz Al-Sabah said he expects banks’ non- performing loans to decline in 2011 after they fell to 7.4 per cent in 2010 from 10.2 per cent in 2009.  What is the outlook for non-performing loans in Kuwait (NPLs) in 2012? What are your expectations for Burgan Bank?

What one needs to know by asking this question is that in Kuwait, the concept of non-performing loans is not the same as it is generally known elsewhere. A more conservative perspective is being implemented in Kuwait.  Non-performing loans are outstanding loans that banks report in the balance sheet of customers with whom there have sometimes been problems in the past. If you have a client that got restructured or went back into a normal situation and the client is servicing the debit, we still call it non-performing loan until the client pay back the loan fully. You will find performing loans within the non-performing loan portfolio. 1/3 of our non-performing loans portfolio is actually performing.  

This is one of the most conservative ways of describing problems in your portfolio. Because of such circumstances, there are two ways in which NPL’s go down: either there is a complete cancellation of the outstanding, or there are swaps – change of assets, collaterals for the outstanding. The first scenario is unlikely to be material, because since economies have been in recession, we haven’t seen big cancellations so much. The second scenario may take place, but there are step functions and do not not happen regularly.

Now to address the question of the outlook for 2012: I expect the NPLs to remain slightly stable; there is some new that will come in, some will come out. Overall, I think NPLs have reached the peak already and we will witness a gradual decline in NPLs.

As for the Burgan Bank, we expect NPLs to go down a bit because we have several projects being carried out right now regarding swaps and therefore we are discreetly optimistic that our NPLs will stop going up during 2012 after peaking at the end of 2011.

According to KAMCO research Kuwaiti banks’ main revenue stream remained stagnant in the first half of 2011 as the growth in loan portfolios, the major income driver, has been sluggish resulting in interest income to fall 1.8 per cent during 1H-11 to KWD 884 million down from KWD 900 million in 1H-10. When do you expect the full recovery of the banking sector?

In 2012, the banking sector is going to have a defensive year. Right now is a time when every banker needs to be cautious regarding risks. The reason is not very much because of Kuwait, because the country is quite stable and liquid, but there are threats in the market. I do not need to tell you what is happening in Europe right now. We have to preserve our strength. Literally, every bank here has very strong balance sheets, but there are limited levels of additional investment. If the economy does not grow,  it makes no sense for the banks to grow just for the sake of growing.

For this reason, I think 2012 will see only modest growth. This will change driven by two circumstances, but I don’t see any of them happening in 2012. One is that the economy starts expanding with more vigour in the region and also globally.

The second is that the government starts investing in the Kuwait development plan that has been delayed for a couple of years. This project takes time to take off, but I am not sure that will happen any time soon.

And about the profitability? I was reading that Loan Loss Provisions (LLPs) might take its toll on the profitably in 2012.

Let me speak about Burgan first. Our normalized operating margin in 2011 grew 15%. That is not bad. It is several times the expansion of the GDP so we have been able to win some market share.

Our position is such that even if the conditions remain bearish, we will keep growing, therefore I am optimistic. Please remember that sometimes when organic growth is not so attractive, inorganic growth gives you an alternative, so right now we are looking into different opportunities. Still, the fact remains that we will continue to grow.

Kuwait operation represents approximately two thirds (64%) of the group. We recovered this in 2011. Kuwait operations was severely hit by the crisis of 2008-2009 and because we had subsidiaries that were doing very well, we were able to bridge all the years without having losses. But it was the subsidiaries that carried us. In 2011, Kuwait restored its profitability and went back to normal.

I am sure you have seen that our results for that year are pretty strong. Approximately two thirds of our balance sheet, our positions, our customers and our revenues are coming from Kuwait. It is a good place to be, because with what happened in the region (Arab Spring), Kuwait is one of the most strong and stable economies around. At least for a couple of years, we will continue being more than half. Over time, the growth, the subsidiaries and a faster growing environment will take over.

How do you intend to grow in Kuwait, with the competition from other banks, considering that the market is limited? What are you planning to do?

We still have space to grow. If you look at a medium-term, Kuwait has all the conditions to be a market that should be growing more than the region and the world. So then you have one source of growth. Secondly, three of our four main businesses are very competitive – corporate banking, financial institutions and private banking – are very competitive and are doing very well.

Now, our retail bank, which is the youngest of all retail operations in Kuwait, has been a break-even proposition, and now having restored our profitability, that is where we are going to focus on restoring returns and some growth for the retail bank.

For your international expansion, what are your plans?

There are different aspects to international expansion. You can go from playing inorganic acquisitions – we have been looking for those very actively, but they have to be a good deal for us, not just for the sake of growing.

There is another interesting source that we are looking for right now: to start having international activities even without physical presence there (particularly in the Gulf). Our corporate bank in particular has made some interesting inroads and I look forward to seeing that expansion continuing.

You have also mentioned that you would like more involvement within the group.

KIPCO is a major asset for various reasons. First, it has a lot of prestige for being a well-established investor well beyond the region. It is a door opener for us.

Second, it has been growing in the type of companies that matches our profile of customers. You must keep something very important in mind: we are working with everybody at arm’s length. We do not have any form of subsidies, nor do we have to operate automatically with KIPCO companies if we feel that they do not match our target market. Therefore, KIPCO is a plus and I expect for it to keep expanding in the region, also in Kuwait. It is an interesting avenue for us, but we have to compete at arm’s length with every other bank.

We are part of the same group, but I think that a strong group needs to have a model that is also successful per say. If you operate with subsidies, for instance, the group weakens, because you’re as strong as your weakest link. Having to compete, we are forced to be quite good in what we do – and we have been beating our competitors, but not because of our relationship with shareholders. Shareholders do not micromanage Burgan Bank.

Therefore it is a great profile to have, but maximum 15% of our corporate portfolio is related to them, so we have 85% which is somewhere else.

Last year, you managed to reduce your cost of credit by 72%. What is your secret of success?

Without trying to claim merits that we don’t have, there is a cycle. After a certain point in time, the credit costs go down. Eighteen months ago, the first thing that we did was to look very carefully at the risk architecture and how to deal with our legacy of write-offs.

This year, we were very successful, but we still had to take some losses of legacy portfolio for which some problems materialized later on. By focusing on fundamentals and not working into something that in the Arab world was very frequent – name lending, for instance –, we don’t do this. We focus on the fundamentals. We have been able to avoid new problems with an active performance of our risks and on recoveries, we have had a very good year.

What is the bank’s exposure to real estate and investment, that have not been doing very well?

In terms of the real estate, our exposure is important and is good. Let me tell you why. First of all, our level of portfolio related to just real estate and construction does not exceed 25%. However, our dependence on real estate, more important than our lending, is due to the collaterals that we have from our lending.

Basically, we accept three types of collaterals: the cash, the shares (quoted shares) and real estate. We are lending, particularly with new customers, essentially based on their cash flow, their solvency, their collaterals and their character. Now, the times of lending just according to collaterals are part of the past in Burgan. It is not the case anymore.

As a rule, however, let’s say with collaterals, we are having 150% of our exposure. That means we are protected from downsides quite well. It expresses in another form. We believe that although 2012 (and maybe also 2013) could be bearish years, the value of the properties is probably as low as it can get unless there is a major crisis. Right now, we are at the bottom of the cycle and therefore our exposure to real estate (because they are so low) is part of our strength.

Is that something you would like to grow?

As for most of the bank, what you have to do is to mimic in your portfolio the size of the economy. We are the bank that has the lowest concentration on real estate in this environment. By design, not to be lower than the rest, we are looking at all sorts of businesses.

But if you look at some of our competitors, you will see concentration higher than ours, but considering the current situation of the economy, we do not consider our low concentration to be a weakness.

In what areas would you like to grow then?

The area in which Kuwait is less developed than any others is in manufacturing. We have an oil-related industry, as well as activity in infrastructure, real estate, construction. We also have an interesting financial sector. Business, in terms of retail and private banking is also important for us.

Finally, our expansion in supporting our customers that are prospering and working outside of Kuwait is a very important piece of our future. Manufacturing, I would like to do a little bit more, but only when – and if – it meets the profile that I spoke of before: business practices, good character, etc.

You are also topping the list with your return on equity.

Something that you find quite often is that companies tend to present their success and their growth. It goes without saying that size is very important in banking because of scale economies, but the real game is about returns.

We have made a dogma out of this: that we need to have superior returns in order for our shareholders to give us money to use, so that we can give them dividends in return. When you look at our returns, indeed, in 2011, we were probably at a peak. And this is how we intend to continue.

Our inorganic targets will only fly provided that we believe we can construct attractive returns for shareholders. Because we have that focus, we are probably exceeding 15%. At this point in time and position in the cycle, this is very good return.

What is your outsider perspective of Kuwait banking sector and system? What strikes you are the differences?

Kuwait is a very focused market in fundamentals: for lending, essentially, you have a group of investors on construction supporting the government and the oil industry, it is very focused.

Kuwait has not seen the sort of crisis that other markets have seen. Therefore, our customers tend to sometimes underplay the risks that economic downturn may imply for them. In this respect, I believe that Kuwait will evolve with time into more sophistication.

However, Kuwait cannot escape in terms of its economic cycles to the regional aspect of what is happening in the Gulf. Therefore, I see an opportunity for the financial sector to develop further, because I have no doubt that Kuwait may be at one of the lowest risks for savings, for doing business.

I am rather optimistic that if we work together and the government supports sound transformational changes, we could have something quite interesting building up for the next decade.