Monday, Sep 14, 2009

By Dania Saadi

Of ZAWYA DOW JONES

DUBAI (Zawya Dow Jones)--Kuwait Finance House (FKIN.KW) the Gulf region's second-largest Islamic lender by market value, is eyeing property deals in southeast Asia and buying Gulf sovereign sukuk as the bank seeks to expand its operations outside the region's third-largest economy.

"We are looking at other markets in the Far East, including China, which is leading in economic growth. Investments in real estate (in the Far East) could be bigger (than in the U.S.)," Mohammed al-Omar, the bank's chief executive officer, said in an interview in Kuwait recently.

The Kuwait-based lender said in August it will set up a joint venture with U.S. real estate investment company UDR Inc. (UDR) to buy into high-income residential units with up to $450 million in investments.

"We came back to the U.S. real estate market because we saw an opportunity for income producing property for the long-term. We anticipate these are the best instruments to do investments in right now," he added.

Islamic lenders in the Persian Gulf, the world's biggest energy-exporting region, are seeking investments outside their home markets as they tap new sources of growth to counter competition at home and economic slowdown from sagging oil prices.

Kuwait Finance House competes in Kuwait with Islamic rivals Boubyan Bank (BOUBYAN.KW), in which the country's largest bank, National Bank of Kuwait, has become a majority shareholder, and Kuwait International Bank (KIB.KW). Kuwait Investment Authority, the country's sovereign wealth fund, owns a 24% stake in Kuwait Finance House, Kuwait bourse data show.

SUKUK PURCHASE

Kuwait Finance House, which operates in countries including Turkey and Malaysia, is also mulling buying sovereign Gulf Islamic bonds or sukuk, as the bank looks to invest its cash in the tight lending market.

"Gulf government sukuks are a good buy," al-Omar said. "Infrastructure spending of the GCC needs sukuk because all of them are asset-backed."

Islamic banks comply with a ban on interest income and refrain from investments in sectors such as gambling and alcohol.

Sukuk issuance, which dropped to $9.3 billion in the first half of 2009 from $11.1 billion in a year-earlier period, is expected to pick up in the medium term with about $50 billion of bonds announced or talked about in the market, Standard & Poors said earlier this month.

Kuwait Finance House is focusing on expanding its banking activities in the Gulf states, including Saudi Arabia and the United Arab Emirates.

"Saudi Arabia is one of the best markets nowadays because of government spending and the support of the kingdom to the private sector," said al-Omar.

"We are hoping we will get, by the second half of next year, approval for opening in the U.A.E. Our policy is to expand and grow our operations organically and not by acquisition."

Gulf Arab economies, including Saudi Arabia and Kuwait, are forecast to contract in 2009 after the OPEC members cut production in line with the group's decision and oil prices dropped nearly by half from the $147 a barrel peak reached in July of 2008, the International Monetary Fund has said.

Kuwait is expected to be the worst performer out of the six Gulf states, with a forecast of a 1.2% contraction in 2009, the IMF said in May.

PROFIT OUTLOOK

Kuwait Finance House posted a 61% drop in second quarter net profit to KWD32.8 million ($114 million) as the lender made more provisions against bad loans. The bank took KWD102 million in provisions for impairment in the first half of 2009.

"We are waiting to see some government spending taking place in Kuwait, then the second half will be much better," said al-Omar.

Kuwait Finance House has said it has limited exposure to troubled companies in Kuwait and has ample provisions to cover any possible defaults.

Several banks in Kuwait and other Gulf states have posted a drop in second quarter profits as they boosted provisions to cover their exposure to two troubled Saudi family groups and local companies struggling to pay debts.

"We took provisions as needed," Al-Omar said. "If things don't change, we will maintain the same policy, and we will maintain the right provisions."

Standard and Poors affirmed in July its ratings for Kuwait Finance House, but gave the Islamic lender and other Kuwaiti banks a negative outlook, citing increased credit risk and their exposure to the country's troubled investment and real estate firm sectors that are likely to affect their financial profiles.

Kuwait Finance House is also working to reduce its non-performing loan, or NPL, level, he said. NPLs stood at 12% of total loans at the end of June and more than half of it was categorized as NPLs as a precautionary measure. This compares with a 7% NPL out of total loans at the end of June 2008.

-By Dania Saadi, Dow Jones Newswires, +9714-364-4960; dania.saadi@dowjones.com

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(END) Dow Jones Newswires

14-09-09 0639GMT