Last Tuesday, Kuwait's Burgan Bank K.P.S.C. provided details on a capital increase after receiving approvals from the Central Bank of Kuwait and the local Capital Markets Authority.
The bank set the subscription period between 20 September and 10 October and plans to issue 240,581,530 new shares at an offer price of 260 fils per share, according to Moody’s.
The capital increase is credit positive for Burgan because Moody’s estimates that it will enhance the bank’s Common Equity Tier 1 (CET1) ratio by 110 basis points, bringing it substantially above the regulatory minimum, and will allow Burgan to take advantage of new business opportunities locally and in the region over the next 12-18 months.
Burgan reported a CET1 capital ratio of 11.0 per cent as of June 2018 (excluding current-year profits), compared with a regulatory minimum of 10.5 per cent for the same period, which includes a one per cent domestic systemically important bank buffer specific to Burgan, while the bank's margin above its CET1 regulatory minimum was the lowest among Kuwaiti conventional banks, driven by its tight capital management, and would have constrained the bank’s ability to grow.
The fresh capital will increase Burgan’s capital base by KWD 63 million (around $207 million) and raise its CET1 ratio to a pro forma 12.1 per cent. Although it likely that Burgan's capital metrics will lag its local peers, the new capital, along with future retained earnings, will allow it to resume its asset-growth strategy.
Burgan’s customer loans in Kuwait shrank seven per cent year on year as of June 2018, versus growing six per cent in 2016, but Moody’s expects that higher oil prices—the Brent spot price is expected to average around $72 per barrel in 2018 and $71 per barrel in 2019—and large infrastructure projects driven by the Kuwaiti government’s development plan will support operating conditions and provide new business opportunities for banks in Kuwait.
Moody’s also expects Burgan to continue to grow selectively in overseas markets. Overseas subsidiaries comprised 37 per cent of Burgan's total loans and 40 per cent of revenue as of June 2018, but the bank's financial metrics are vulnerable to political and economic developments in some of those markets: Turkey, Burgan's largest overseas market, accounted for 26 per cent of the bank's loans and 21 per cent of its revenue as of June 2018.
However, Burgan's common equity is insulated from the immediate effect of the Turkish lira depreciation because, according to the bank, its capital investment and retained earnings in Turkish lira are fully hedged against foreign-exchange revaluation gains or losses. Therefore, although we expect Turkey to contribute to some asset quality deterioration and a lower contribution to group earnings, both because of the deterioration of Turkey's operating environment and the lira devaluation, we do not expect those factors to negatively affect Burgan's capitalisation.