Kuwait Finance House (KFH) on the 26th March announced the launch of a new five-year transformation plan involving the restructuring, merging or sale of unprofitable affiliates. The bank is also looking to restructure its management and its financial department; a move that comes as the bank continues to struggle with provisions for bad debt.
A key component of its management reshuffle includes new executive appointments, which have received approval from the board of KFH and now await the go-ahead from Kuwait’s central bank.
With continuing negative surprises emerging from its financial results, could the bank’s new plans prove crucial to regaining its financial freedom?
Missing the mark
Despite reporting a profit of US$133.21 million for 2011 and strong top-line growth of 67% quarter-on-quarter and 18% year-on-year, KFH’s financial results came in below market expectations.
Global Investment House (GIH), which recently released its quarterly report on GCC bank profitability for the fourth quarter of 2011, noted that while all banks under its coverage in Kuwait reported a sharp rise in provisions, “KFH fared the worst and saw its provisions rising 2.5 times over the previous quarter and 118% year-on-year; these were the highest quarterly provisions taken by KFH since the fourth quarter of 2008.”
Its provisions underline a worrying trend in KFH’s profitability that surfaced amid the 2008 financial crisis. The bank’s profit for 2011 was almost half than what it recorded in 2010; as it recorded US$1.15 billion-worth of impairments. GIH also noted that KFH stood out among its Kuwaiti peers due to its provisioning.
The bank has attributed its weaker performance to the global economic climate and “operational problems”.
Internal restructuring
The bank’s impending executive appointments are sure to be a key factor for the market to keep an eye on going forward. Its management currently comprises Mohammed Sulaiman Al-Omar, its chief executive, five assistant general managers and three deputy assistant general managers. Mohammed Sulaiman, who announced the bank’s new initiatives and has been a stalwart at the bank for most of his career, may not be affected by the management shake-up.
In addition to the appointment of new leaders, the bank is also looking to reorganize its structure; establishing separate banking, investment, operations and wealth management divisions. It also sees a need to boost its capital base, which declined to US$5.59 billion last year from US$5.75 billion in 2010; and to create a governance and inspection committee.
A point to note is that KFH’s current plans sound similar to measures taken at its Malaysian arm, Kuwait Finance House (Malaysia); which also instituted a five-year plan in 2010. KFH Malaysia’s plan involved a diversification of income to grow its retail business, following a spike in bad debt at its wholesale division. The Malaysian arm also looked to enhance its standard operating procedures, credit control and risk management in an effort to improve asset quality.
Asset consolidation
Another development to look out for is KFH’s decision on its affiliates. According to its 2011 annual report, the bank has 15 subsidiaries and five associates. Its financial statements also show that its investment in associates amounted to US$1.76 billion last year; while its share of loss of associates amounted to US$8.28 million; compared with US$206.4 million in 2010.
Sameer Yaqoub Al-Nafeesi, the chairman of KFH, noted that the bank’s new strategy, which it has appointed consulting firm Booz Company to help develop, is based on developing KFH’s investment portfolio and increasing coordination among its subsidiaries.
With its growing pile of bad debt and possibly convoluted web of subsidiaries, a little housekeeping may be just what the bank needs to manage its growth.