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Profits flat despite strong bank results

 Aggregate profits of listed Kuwaiti companies during the first half of the year were unimpressive, despite the strong growth in bottom lines seen by banks. A solid performance by banks during 1H14, on the back of an improving operational environment and reduced provisioning, boosted overall earnings and offset weakness in other sectors. Most of the weakness came from the real estate and non-bank financial services sectors, following several years of strong recovery in both, though other sectors also saw declines. Despite flat reported earnings, the stock prices reacted positively as the outlook remains favorable. 

 
The reported earnings of 165 listed companies were down 1.3% year-on-year (y/y) in the first half of 2014 to KD 810 million, off by only KD 11 million from a year ago. The aggregates conceal more mixed results, with over 70 companies reporting declines in profits compared to a year ago while 94 companies reported healthy growth. Also, this year was the first time since 2010 that total reported losses did not shrink, instead doubling to KD 42 million, though the number of loss-making companies was stable at 27.
 
Banks continued to ride the economic upturn, benefitting from reduced provisions and a healthier appetite for credit. As a result, bank profits experienced their best half in four years, growing by 16% y/y to KD 315 million. At 39%, banks accounted for the lion’s share of total reported earnings. Their contribution increased by seven percentage points compared to a year ago at the expense of the real estate and financial services companies, as these saw their shares shrink to 10% and 8%, respectively. 
The real estate and financial services sectors led most of the declines in profits observed this half, with aggregate profits for the sectors contracting by KD 28 million and KD 15 million, respectively.
 
Most of the declines in the financial sector were triggered by unusual items at a handful of companies. If those are excluded, earnings in the sector show an increase of 4% versus the 18% drop, reaffirming the sector’s positive, but slow, recovery. Declines in the real estate sector were more widespread, though a small number of companies still dominated the declines.
 
Other sectors reported mixed result. While the technology, and oil & gas sectors displayed strong growth, the bulk of the rest saw negative earnings growth, led by consumer services companies. Indeed, the consumer sector’s profits shrunk by 7.5%, despite a healthy 10% increase in earning at consumer goods companies. Equity prices have reacted positively to the profit announcements thus far. The value-weighted index is up 5% since the end of 2Q14, following its minor correction during that quarter. With regional tensions subsiding, the KSE will continue to benefit from a more investment friendly outlook for Kuwait.
 
 

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