Boursa Kuwait performance mixed during week
The US Federal Reserve decided on 13/06/2018 to raise the interest rate on the US dollar by a quarter percent point to 2%. This was the seventh increase since the first increase on December 16, 2015. The base interest rate was fixed at 0.25%, almost zero, since the 2008 crisis. The Central Bank of Kuwait did not follow suit the US Federal directions this time and fixed the discount rate at 3%. Thus the discount rate dependency on the USD interest rate has been 4 times out of 7 times since 16 December 2015. The last agreement decision before that was last March. Unlike Kuwait, four out of the other five GCC countries whose currencies’ exchange rates are fully connected with the US dollar raised the interest rates by a quarter percentage point for each. Only Oman did not raise the interest on deposits, i.e. deposits of banks and financial institutions at the Central Bank. It increased it by half a percent point in March 2018 to become 1.5%. We should remind that Kuwait’s Central Bank adopts a basket of currencies to determine the KD exchange rate, with heavier weight by far to the US dollar. This policy provides it with broader flexibility than its peers in the GCC in deciding its monetary policy. Since the beginning of the current millennium, the interest rate movement on the KD conformed to the movement of the interest rate on the US dollar 27 times, and differed 23 times. The Central Bank of Kuwait unilaterally moved it up once and down five times , says Al-Shall Economic Report prepared by Al-Shall Consulting Co headed by Jassem Al-Saadoun.
We believe that the Central Bank of Kuwait’s maneuver margin in not fully agreeing with the US dollar interest rate has shrunk sharply. According to late US Federal estimates, it is likely to raise the interest rate twice during the remainder of the year, and three times in 2019, thus threatening the Central Bank’s prime target, i.e. to guarantee the attractiveness of the return on KD deposits for its repatriation. Despite our confidence in the ability and professionalism of the Central Bank of Kuwait and the abundant information it has, which make its decisions reliable, we believe that its current resolution by fixing the interest on the Kuwaiti Dinar was difficult. This means that its usefulness and harm are quite close. On one hand, interest margins on the two currencies get narrower after the margin between the discount rate on the Kuwaiti Dinar and the base interest on US dollar lost 0.75% points since December 16, 2015. This threatens the repatriation of the Kuwaiti dinar. On the other hand, there is due concern with the negative impact for raising the interest rate on the fragile economic growth and the impact of the violent geopolitical events which, in addition to causing a fragile growth, cause extensive weakness in the banks’ credit growth to the private sector. Higher interest rate will be more frustrating.
Therefore, we expect more pressure in the near future which tend to make closer to following the interest rate movement on the US dollar. That will not be costless. The choice between the two options will be difficult, or a choice between what is bad and what is worse.
Foreign Direct Investment (FDI)
The United Nations Conference on Trade and Development (UNCTAD) released a report on June 6 about foreign direct investment flows, including inward FDI in 2017. The report concludes that it encountered a considerable drop from about US$ 1.868 trillion in 2016 to about US$ 1.430 trillion, about 23.4% decline. Most of that decline is not of our concern because it came at the expense of the developed countries. Flows to those countries decreased from about US$ 1.133 trillion in 2016 to about US$ 712.4 billion in 2017, with about 37.1% loss from 2016 flows. We are not concerned either with the most important reasons for this decline. The report attributes most of it to a drop in merger and acquisition processes across borders between those countries by about 21.8%, though they had reached high and inflated levels in 2016.
Our interest is restricted to the movement of FDI flows to GCC countries. The importance of FDI exceeds by far the importance of the indirect foreign capital flows, which captured an undue attention with the wave of the upgrading regional bourses to emerging ones. The preference of FDI comes from its long term duration, i.e. stability which is translated to creating job opportunities and transfer of administrative skills and developed techniques contrary to hot and often harmful flows for speculation in stock exchanges.
Report figures point to a discouraging situation of the FDI flows to GCC states which dropped to about US$ 16 billion in 2015 from exceptional flows of about US$ 45.4 billion in 2010 immediately after the deterioration of oil prices in bad times. Then rose to USD 20.2 billion in 2016, or about 44.4% of 2010 flows. More importantly, they scored their lowest level in 2017 since 2010 and scored about US$ 15.5 billion, a 23% drop from 2016 level. That occurred while all reform visions in the region targeted the attraction of maximum amount of those flows.
That decline was not comprehensive but affected only two of the six GCC States, with the highest drop went to Saudi Arabia whose share dropped from US$ 7.5 billion in 2016 to about US$ 1.4 billion in 2017 an 80.9% decline. The second state was Kuwait whose FDI’s share decreased in 2017 to only US$ 301 million from US$ 409 million in 2016, i.e. 28.2% drop. In the second annual report of the Kuwait Direct Investment Promotion Authority (KDIPA) for 2016, it states that it approved 19 licenses in that year with a total value of KD 329 million — more than US$1 billion — although the approval of projects does not spontaneously mean capital inflows, as the inflow is weakening according to “UNCTAD”.
In return, two thirds of FDI flows in 2017 belonged to the UAE. About US$ 10.4 billion, an increase by about 7.8% over 2016 level of flows. The highest relative increase in the GCC flows in 2017 went to Bahrain whose share went up from US$ 243 million in 2016 to about US$ 519 million in 2017, by about 113.2% growth rate. The second highest growth rate for these flows went to Qatar by 27.4%. This increased value of FDI to US$ 986 million in 2017 up from US$ 774 million in 2016. Oman came third in these flows in 2017 by 11.1%. It also captured the second highest absolute number by about USD 1.867 billion, and thus excelled Saudi Arabia for the first time in absolute value of those inflows.
FDI flows, besides their superior importance as we mentioned, are highly sensitive to the internal political developments; they are also very sensitive to the safety and smoothness of the business environment and to the high levels of corruption. Each country wants to attract those flows should review its position on the stated sensitivity indicators.
Some Energy Statistics 2017
Issue No. 2018 entitled “BP Statistical Review of World Energy” issued by the British Petroleum (BP) Company, as published on the company website, indicates that the consumption rate growth of global energy in 2017 rose to about 2.2% compared to 1.2% in 2016. Global growth rates of energy in 2017, consumption compared with their level in 2016, scored 3% for natural gas, 1.8% for oil, 1.1% for nuclear energy, 1% for coal, the most pollutant, and 0.9% to hydroelectricity.
Volume of the global proved oil reserves reached 1696.6 billion barrels, lower by 0.5 billion barrels compared with the end of 2016. The core of oil reserves is still in the Middle East, which contributes by about 807.7 billion barrels, 47.6% of global oil reserves, with 99.6% is located in the Arabian Gulf Region (the GCC countries excluding Bahrain, but does include Iran and Iraq). South and Central America accounts for 19.5%, or approximately 330.1 billion barrels, with North America contributing by 13.3% or about 226.1 billion barrels, the Commonwealth of Independent States (CIS) accounts for 8.5%, about 144.9 billion barrels, and Africa accounts for 7.5%, or about 126.5 billion barrels, and Asia Pacific by 2.8%, or about 48 billion barrels, and finally Europe which accounts for 0.8% or approximately 13.4 billion barrels.
In 2017, the Middle East region produced 34.1% of global oil production which scored nearly 92.649 million barrels per day (Saudi Arabia 12.9%, Iran 5.4%, Iraq 4.9%, UAE 4.2% and Kuwait 3.3%). They also contribute, as previously mentioned, by about 47.6% of global oil reserves. North America produced 21.7% of global oil production (USA 14.1%), the CIS produced 15.4% of global oil production, Russian Federation 12.2%, Africa produced 8.7% of the global oil production, Asia Pacific produced 8.5% of the world oil production, China produced 4.2%, and Europe produced 3.8% of the world oil production and Norway 2.1%.
Asia Pacific consumed 35.2% of the global oil consumption (China 13%, India 4.8%, Japan 4.1%, South Korea 2.8%), while North America consumed approximately 24.7% (USA 20.2%), Europe and the CIS consumed about 19.7% (Russian Federation 3.3%). The above indicates that oil is mostly consumed outside the areas of its high reserves, noting that heavy consumption lies eastward of the its reserves concentrations. This inclination will increase over time as India, China and Japan consume more than the United States’ consumption, while Asia Pacific produces 39% of North America oil production, this means its import need is much higher.
The Middle East contribution to the world’s natural gas reserves is around 40.9%. Iran possesses 17.2% of world reserves, Qatar 12.9%, Saudi Arabia 4.2%, U.A.E. 3.1%. Europe and the CIS have 32.1% of the world’s natural gas reserves (Russian Federation 18.1% and Turkmenistan 10.1%), and produces about 28.2% of global natural gas production (Russian Federation 17.3%), Europe and the CIS consume approximately 30.2% of global consumption (Russian Federation 11.6%). North America produces 25.9% of global production though it owns only 5.6% of global natural gas reserve. North America consumes slightly less gas than what it produces, i.e. 25.7% of global consumption (USA 20.1%); Asia Pacific consumes about 21%, (China 6.6%) and it obtain approximately 10% of world reserves and produces approximately 16.5% of world production, meaning that natural gas consumption is largely concentrated in its production sites.
Coal reserve distribution differs. Asia-Pacific region has 41% of world reserves (Australia 14%, China 13.4%, and India 9.4%). Europe and the CIS 31.3% (Russian Federation 15.5%); North America has about 25% (24.2% USA). The same applies to production. Asia Pacific excels others by 71.7% share of global output (China 46.4%). Europe and the CIS produce about 11.6% of global output (Russian Federation 5.5%), while North America accounts for 10.8% of production (USA 9.9%). Asia Pacific consumes approximately 74.5% of global consumption (China 50.7%(. Europe and the CIS consume approximately 12.1%. North America consumes around 9.7%. The foregoing clarifies that the feature of concentrating coal reserves in the consuming countries justifies the growth of its demand, and consequently its consumption growth, despite its being the most polluting source of energy.
Finally, oil still takes the lead in energy components’ consumption. It accounts for 34.2% of the total, leaving approximately 27.6% for coal, 23.4% for natural gas, 6.8% for hydroelectricity, 4.4% for Atomic Energy, and 3.6% for the renewable energy.
Boubyan Bank Financial Results – First Quarter 2018
Boubyan Bank announced results of its operations for the first quarter of the current year, which indicate that the bank’s profit (after tax deduction) scored KD 12.65 million, a rise by KD 2.11 million or by 20%, compared with KD 10.54 million for the same period of 2017. The rise in net profit is attributed to the rise in total operating income by a higher value than the rise in total operating expenses.
In details, all items of the bank’s operating income increased by KD 4.8 million or by 16.3%, and scored KD 34.2 million versus KD 29.4 million for the same period of 2017. This resulted from the rise in the item of net financing income by KD 2.8 million or by 11.3%, reaching KD 27.5 million compared with KD 24.7 million. Item of net fees and commission income also increased by KD 1.2 million to KD 3.8 million from KD 2.6 million.
Total operating expenses rose by a lesser value than the rise in total operating income, i.e. by KD 1.28 million or by 10.4%, and scored KD 13.64 million compared with KD 12.36 million in the same period of 2017. The rise included all items of operating expenses. Percentage of total operational expenses to total operational income scored 39.9% versus 42.1%. Provisions for impairment increased by KD 1.3 million and scored KD 7.3 million compared with KD 6 million, a rise by 22%. Net profit margin scored 37% of total operational income versus 35.9% in the same period of 2017.
The bank’s financial statements indicate that total assets increased by KD 240.1 million or by 6%, and scored KD 4.210 billion compared with KD 3.970 billion in the end of 2017. The rise in total assets scored KD 537.3 million or by 14.6%, when compared with the same period of 2017 when it scored then KD 3.673 billion. Item of Islamic financing to customers increased by KD 136.7 million or by 4.8%, to KD 3.013 billion (71.6% of total assets), compared with KD 2.877 billion (72.5% of total assets) in the end of 2017. It increased by 12.8% which equals to KD 342.3 million, compared with KD 2.671 billion (72.7% of total assets) in the same period of 2017. Percentage of Islamic financing to clients to total clients’ deposits scored 85.5% versus 85%. Item of deposits with other banks rose by KD 98.7 million or by 30.5%, and reached KD 422.5 million (10% of total assets) versus KD 323.9 million (8.2% of total assets) in the end of 2017. It also rose by KD 73.7 million or by 21.1%, when it scored KD 348.9 million (9.5% of total assets) compared with the same period of 2017.
Figures indicate that the Bank’s liabilities (excluding total equity) increased by KD 248 million or by 7%, and scored KD 3.766 billion compared with KD 3.518 billion in the end of 2017. When compared them with total liabilities in the same period of 2017, we will find a rise by KD 514.5 million or by 15.8%, when total liabilities scored KD 3.252 billion. Percentage of total liabilities to total assets scored 89.4% versus 88.5%.
Results of analyzing financial statements calculated on annual basis indicate that the entire bank’s profitability indexes rose compared with the same period 2017. The average return on shareholders’ equity (ROE) increased to 13.6% from 12.4%. Likewise, the average return on capital (ROC) increased also and scored 21.7% versus 19%. The average return on assets (ROA) rose slightly to 1.24% versus 1.18%. Earnings per share (EPS) scored 5.27 fils versus 4.47 fils. (P/E) remained at 22.9 times as a result of the rise in the earnings per share (EPS) and the rise in the share market price by almost the same rate by 17.9% and 17.8% respectively compared with their level on March 31, 2017. (P/B) scored 2.6 times versus 2.2 times.
The Weekly Performance of Boursa Kuwait
The performance of Boursa Kuwait for last week (3 working days due to Eid Al-Fitr holiday) was mixed compared to the previous one where the traded value, traded volume and the number of transactions showed an increase, while the general index showed a decrease. AlShall Index (value weighted) closed at 393.6 points at the closing of last Thursday, showing a decrease by 0.8 points or by 0.2% compared with its level last week, while it increased by 6.6 points or by 1.7% compared with the end of 2017.
The following tables summarize last week’s performance of KSE
Week 25 Week 24 Diff
21/06/2018 14/06/2018 %
Working days 3 5
AlShall index (33 cos) 393.6 394.4 -0.2%
Boursa All Share Mkt Index 4,823.0 4,842.7 -0.4%
Value Trade (KD) 46,032,812 53,127,322 44.4
Daily average (KD) 15,344,271 10,625,464 44.4%
Volume Trade (Shares) 192,221,541 213,699,258
Daily average (Shares) 64,073,847 42,739,852 49.9%
Transactions 9,130 10,408
Daily average (Transactions) 3,043 2,082 46.2%
Most Active Sectors & Companies
Description Value Traded % of Total
Sectors KD Market
National Bank Of Kuwait 8,391,730 18.2%
Mobile Telecommunications Company 6,931,349 15.1%
Kuwait Finance House 4,087,369 8.9%
Gulf Bank 3,741,079 8.1%
Jazeera Airways Co. 2,154,743 4.7%
Total 25,306,271 55%
Description Value Traded % of Total
Sectors KD Market
Banks Sector 24,489,878 53.2%
Telecommunications Sector 7,010,279 15.2%
Industrials Sector 3,515,975 7.6%
Consumer Services Sector 2,906,295 6.3%
Financial Services Sector 2,786,518 6.1%
Al Shall Index Week 25 Week 24
Increased Value (# of Companies) 15 19
Decreased Value (# of Companies) 14 4
Unchanged Value (# of Companies) 4 10
Total Companies 33 33