alshalalKUWAIT: A paragraph in our last week report called for   starting    a   process of   confidence-building in Kuwait Stock Exchange (KSE). This process certainly warrants legislation and decisions that cope with the essential changes in the global and domestic investment climate. For those decisions and legislations to be fruitful, they need quick reform to some basics, namely, the supply of stocks and the demand for them. As the Chinese did in the quick reform measures last summer when they started first by limiting the supply surplus coinciding with demand stimulating measures. And it seems until now at least that the plan succeeded.

Most reactions focused on the section of the paragraph in which we mentioned that 75 percent of the listed companies are sold at less than their book value. They stressed two points which we value.

First is the call for government intervention to purchase from the 103 small companies category. Is this a new orientation to AlShall? The answer is that the call is documented in our reports more than 10 times since 2008 and is irrelevant of course to the failing support/subsidy. It is a call for purchase for the benefit of the public funds.

Second, is the government administration capable of studying, buying and restructuring this huge number of companies without corruption. Though we cannot guarantee that but specifying buying criteria, price levels and leaving the selling as an option to shareholders and conditioning the consent of the absolute majority of shareholders in each company are controls that will help   restrict corruption prospects and deviation in the decision. Benefits outweigh losses.

The purpose of the proposal was to reduce or withhold stocks from the supply side and stimulate the demand side by saving liquidity and increasing confidence in the remaining companies after filtering the listed companies. It justifies the drop in the liquidity of the first ten months of the current year by -32.5 percent vis-a-vis 2014, the drop  in  the  second  quarter  liquidity  by -18.7 percent compared with the first quarter, the third quarter's liquidity by -29.1 percent below the second quarter and the drop in last October liquidity by -39.7 percent compared with October 2014.  The proposal also is a preventative measure or hedging before liquidity shrinkage continues or even accelerates associated with pressure on prices which threatens to transform the crisis from one of assets price to a deficit crisis in mortgages.

Until the impact of reduced supply clarifies, we notice that Abu Dhabi's liquidity in the first 10 months of 2015 was at $12.82 billion, and the Kuwaiti liquidity was close to it at $11.33 billion. But the share from liquidity of a company listed at Abu Dhabi market in the same period was $237 million per company (54 listed companies only), $59 million for a Kuwaiti listed company (192 companies most of which are dormant), $ 519 million for Qatar (43 listed companies), $611 million for Dubai (62 listed companies), $2.29 billion for Saudi market (166 listed companies), and $40 million for the Omani, which is close to the Kuwaiti market though its capital value is no more than 22.3 percent of the Kuwaiti stock market's capital value.

The bottom line is that diagnosis implies that there is an unhealthy and unjustified case in the Kuwait stock exchange with open and strong exacerbation prospects. The best policies are the preemptive or preventive ones like our proposal here or before. But sitting idle and motionless to watch while the conditions continue their deterioration is no option.

 Local real estate market

The latest available data at the Ministry of Justice -the Real Estate Registration and Authentications Department- excluding crafts activity, parking lots, restaurants and the coastal strip indicate drop in the real estate market liquidity during October 2015 by -8.4 percent vis-a-vis September 2015 liquidity. Total value of contracts and agencies trading scored KD 187.2 million versus KD 204.3 million but it dropped by -50.4 percent compared with October 2014 trading.

October 2015 trading was divided between KD 179.5 million for contracts and about KD 7.7 million for agencies. Number of real estate struck deals in the month was 351 deals distributed between 334 contracts and 17 agencies. The highest share went to Al-Ahmadi Governorate which captured the highest percentage in the number of real estate deals (119 deals) representing about 33.9 percent of the total number of deals, followed by Hawally Governorate by 68 deals, representing approximately 19.4 percent, while the lowest share went to Jahra Governorate by 18 deals representing about 5.1 percent.

Value of private residential trading scored KD 76.3 million, down by about -14.2 percent, compared with KD 88.9 million for September 2015. Its contribution dropped to 40.7 percent of total value of real estate trading compared with 43.5 percent in September 2015. The monthly average value for private residence trading in 12 months scored about KD 137.2 million. This means that trading value in this month is lower by -44.4 percent compared with the average. Number of deals for this activity rose to 245 deals (226 deals in September 2015). Therefore, the average value per deal of private residence activity scored about KD 311.4 thousand.

Value of investment residence activity increased to KD 71.2 million, an increase by 5 percent, compared with KD 67.5 million in September 2015. Its percentage share out of total liquidity rose to about 38 percent versus 33.1 percent in September 2015. The average value for investment residence activity trading during 12 months scored KD 114.8 million, making value of this month trading lower by -38 percent than the 12 months average. Its deals scored 94 deals (91 deals in September 2015). As such, the average value per deal for the investment residence was about KD 757.3 thousand, higher by 2.1 percent than September 2015 average.

Commercial activity trading value dropped to   about   KD  34.5  million,  a  drop  by  -25.2 percent compared with KD 46.1 million for September 2015. Its percentage share out of total real estate trading value dropped to about 18.4 percent (22.6 percent in September 2015). Average value of commercial activity transactions in 12 months scored KD 42 million which means that trading value during  this  month  was  lower  by  about  -17.9 percent than the 12 months' average. Its transactions were 9 deals (11 deals in September 2015). Therefore, the average value of the commercial deal was at approximately KD 3.829 million.  Value of warehousing trading activity was at approximately KD 5.3 million (3 deals).

When we compare October 2015 trading with October 2014, we note decline in the real estate market liquidity from about KD 377.5  million  to  KD  187.2  million,  i.e. -50.4 percent, as we mentioned. The drop involved the private residential activity by -49.5 percent, the investment residence activity by -51.1 percent and the commercial activity liquidity declined by -56.7 percent.

If liquidity average continues at the same average in the past 10 months of the year, total real estate market liquidity in 2015 will  score  about  KD 3.27 billion, less by -34.6 percent than 2014. This means indicators hint at a drop in the real estate market's liquidity coupled with decline in the stock exchange liquidity this year.

Monetary & economic indicators

The periodical Quarterly Statistical Bulletin (April Ð June 2015) of the Central Bank of Kuwait (CBK) as published on its website, provided some economic and monetary indicators whose developments are worth follow up and documentation. The balance of trade (commodity exports minus commodity imports),  for instance, achieved in the second quarter this year a surplus by KD 2.424 billion, up by 37.4 percent compared with the first quarter. Kuwait's commodity exports during the second quarter scored KD 4.866 billion, 89.2 percent of which were oil exports. Kuwait's commodity imports (excluding the military) reached about KD 2.442 billion, a rise of 4.3 percent as compared to that of the first quarter. The surplus in the first quarter was KD 1.746 billion, which means that the balance of trade surplus for the first half this year reached about KD 4.188 billion or KD 8.376 billion if calculated to the entire 2015 year. The surplus might be less due to the continued decrease in oil prices in the third quarter and the past part of the fourth quarter. The surplus will be less by -59.5 percent than its counterpart value in 2014 which was about KD 20.677 billion due to the sharp drop in oil prices.

The bulletin points to continuing drop in the weighted interest rates of balances on deposits from 1.494 percent in the first quarter of this year to about 1.485 percent in the second quarter, a quarterly drop by -0.6 percent. The weighted interest rates of balances on loans continued its drop from 4.394 percent to 4.379 percent, a quarterly drop by -0.3 percent for the same period.

The bulletin also indicated that total deposits of the private sector at local banks scored about KD 34.166 billion, up from KD 33.544 billion in the end of the first quarter this year, a quarterly increase by 1.9 percent. Finally, the local banks claims on private sector rose to about KD 33.753 billion from KD 33.046 billion in the end of the first quarter, a quarterly rise by 2.1 percent.

The CBK financial results

The Commercial Bank of Kuwait announced results of its operations for the first nine months ending 30, September 2015 which indicate that the bank achieved net profits, after tax deductions, by KD 25.39 million (KD 25.34 million in the same period of 2014). This means the bank achieved a slight increase in its profits by KD 49 thousands, or by 0.2 percent. The slight rise in net profits level is due to the rise in total operations incomes by a higher value than the rise in total expenditures.

In details, total operational incomes increased to KD 102.9 million (KD 100.5 million in the same period of 2014). In other words, these incomes increased by KD 2.4 million, or by 2.4 percent, as a result of increase in net gain on disposal of assets pending sale by KD 5.1 million to KD 5.7 million compared to KD 613 thousands in September 2014. Item of net gain from investment securities increased by KD 2.3 million to KD 4 million (KD 1.8 million). Item of fees and commissions increased by KD 2.2 million to KD 25.5 million (KD 23.3 million). While item of net gains from dealing in foreign currencies declined by KD 5 million to KD 1.6 million (KD 6.6 million in the same period 2014).

Total operating expenses went up by less value than the increase in total operations incomes and rose by KD 1.9 million, i.e. 7 percent, to KD 28.9 million (KD 27 million in the same period of 2014). Total provisions increased by KD 506 thousand, or by 1.1 percent, and scored KD 47.48 million (KD 46.97 million in the same period 2014). This increased slightly the net profit margin to 31.3 percent (31.2 percent in the same period 2014).

Total bank assets scored KD 4.035 billion, down by 4.2 percent, (KD 4.213 billion in the end of 2014) and increased by 3.6 percent if compared with assets in the same period 2014 in the amount of KD 3.893 billion. Performance of customers loans and advances portfolio dropped by KD 84.2 million, or by 3.6 percent, to KD 2.236 billion (55.4 percent of total assets), vis-a-vis KD 2.320 billion (55.1 percent of total assets) in the end of December 2014. They also dropped by KD 103.9 million, or by 4.4 percent, when compared with KD 2.339 billion (60.1 percent of total assets) in the same period of 2014.

Item of cash and short term funds balances increased by KD 161.1 million, or by 30.7 percent, to KD 686.4 million (17 percent of total assets) vis-a-vis KD 525.3 million (12.5 percent of total assets) in the end of 2014, and increased by KD 243.4 million, 54.9 percent, when compared with its value in the same period of last year at KD 443 million (11.4 percent of total assets), due to the rise in the item of balances deposits at banks due within seven days by 72.8 percent.

Figures indicate that the bank's liabilities (without including total equity) dropped by KD 176.3 million, or by 4.8 percent, to KD 3.483 billion (KD 3.659 billion in the end of 2014). While they increased by KD 168.7 million, or by 5.1 percent, when compared with the total in the same period 2014. Percentage of loans and advances to deposits scored 66.5 percent down from 73.2 percent in the same period of last year.

Analysis of financial statements, calculated on annual basis, indicates that most bank profitability indexes recorded rise compared with the same period of 2014. Return on average equities relevant to the bank shareholders (ROE) rose to 6.1 percent  (5.9 percent). Likewise, the return on bank capital (ROC) increased to 24 percent compared with 23.9 percent in the same period last year. While return on average bank assets (ROA) decreased slightly to 0.8 percent (0.9 percent). EPS remained constant at 18 fils for the two periods. (P/E) scored 25 times in 30 September 2015 (improved) compared with 27.9 times in the same period 2014. (P/B) scored 1.5 times (1.6 times in the same period last year).

 The weekly performance of KSE

The performance of Kuwait Stock Exchange (KSE) for the last week was mixed compared to the previous one, where the indices of the trade value and the general index, show an increase, while the trade volume index and number of transactions index show a decrease. AlShall Index (value index) closed at 392.5 points at the closing of last Thursday, showing an increase of about 12.1 points or about 3.2 percent compared with its level last week, while it decreased by 51.5 points or about 11.6 percent compared with the end of 2014.