In a presentation for the performance of the banking sector in Kuwait, the Investment Research Department at KIPCO Asset Management Company (KAMCO) has prepared a detailed analysis of the financial statements of the 9 banks listed on the Kuwait Stock Exchange in order to shed some light on the latest developments in the credit market and the strength of the sectorís financial position along with its ability to weather the adverse impact of the financial turmoil.
 Profitability and Revenue Analysis for the Kuwaiti Banking  Sector (2007-2009)
The year 2007 is considered to be the best year for Kuwaiti Banks in terms of profitability and financial performance, which coincided with the expansion in the credit portfolio of banks driven by the robust economic growth and the abundant liquidity in the credit markets in addition to the excellent performance of local and regional stock markets and real estate sector. Kuwaiti banks achieved record profits in 2007 of KD 1.04 bln reflected in a Return on Average Equity (ROAE) of 23.5 percent.
In contrast with 2007, Kuwaiti Banks during 2008 and 2009 failed to sustain the high level of profitability and solid financial performance witnessed in the pre-crisis period. This was primarily due to the tight credit markets, massive losses suffered by the regional and international capital markets along with the increase in the risk of default on loans and credit facilities that had been extended to high profile businesses in the GCC region that were adversely impacted by the slump in the capital markets. Such negative implications have forced Kuwaiti banks and the banking sector in the GCC region to book massive provisions and impairment of investments, which adversely impacted the quality of banksí financial assets and Capital Adequacy Ratio (CAR).
As a result, profitability of Kuwaiti banks deteriorated dramatically during 2008 to reach KD 310 mln compared to a net profit of KD 1.04 bln in 2007. This drop came on the back of high Loan Loss Provisions (LLP) and impairments of investments, which together mounted to KD 883 mln during 2008, and hence weighed down on the sectorís profitability and the financial position of few local banks. However, during 2008 Kuwaiti banks were able to maintain the level of operating profits (before LLP & impairments) at KD 1.25 bln, fuelled by rising interest income, which recorded a 14.5 percent increase to reach KD 2.49 bln despite the significant increase in Non-performing Loans (NPL), which jumped to KD 1.66 bln at the end of 2008 in comparison with KD 701 mln recorded for 2007.
Following along, interest income witnessed a sharp decline during 2009 to stand at KD 1.99 bln as compared to the KD 2.49 bln recorded in 2008. The decline in interest income came in tandem with the slowdown in the growth of banksí loan portfolios on the back of sluggish economic growth, deterioration in the value of financial assets and the massive losses incurred by local and regional firms which elevated the default risk and pushed banks to follow a stricter lending policy with their corporate customers. In fact, the aggregate loan portfolio of Kuwaiti banks grew by 4.7 percent during 2009 to reach KD 28.5 bln (USD 99 bln) in comparison to a 17.7 percent growth posted in 2008. Additionally, banks also witnessed a drop in their non-interest income, which is in large part attributed to the weak performance of investment portfolios and the fluctuations in foreign exchange markets. As a result, banks have started to focus on reducing their cost of borrowing by taking advantage of the low KIBOR and CBK discount rate, while simultaneously strengthening their presence in the markets abroad and expanding their services to new markets in an effort to diversify their sources of income. Accordingly, banks managed to maintain their operating revenues in 2009 at KD 1.81 bln, while net profit modestly improved in 2009 to KD 356 mln. On the other hand, NPL in 2009 jumped to KD 3 bln from KD 1.66 bln at the end of 2008, while LLP dropped by KD 137 mln to KD 746 mln from KD 883 mln over the same year.
 Moreover, ROAE for Kuwaiti banks witnessed its greatest decline ever during 2008 to reach 6.4 percent as compared to the double digit return of 23.5 percent registered in 2007. This drop came on the back of the massive decline in net profits posted by banks along with the large amounts of provisions booked during Q4-08, which impacted adversely the bottom line figures of local banks. However, in 2009 ROAE rose slightly to 7.5 percent, thus illustrating a modest improvement from 2008.
The rise in NPL since the start of the financial crisis in Sep-08 led to a decline in banksí NPL coverage ratio (Provision Reserves / NPL) from an all time high of 124 percent in 2007 to 89.4 percent and 68.3 percent in 2008 and 2009 respectively; NPL in 2009 surged to KD 3 bln compared to the KD 1.48 bln and KD 869 mln recorded at the end of 2008 and 2007 respectively. Thus, the percentage of NPL to Gross Loans rose from 2.9 percent in 2007 to 5.7 percent and 9.7 percent in 2008 and 2009 respectively leading to deterioration in the quality of banksí assets and putting further pressure on core profitability ratios.