Kuwait Finance House (KFH) has convened the ordinary and extraordinary general assembly meeting at Sheraton hotel with a 79.156% quorum, followed by a press conference to discuss the acquisition of Ahli United Bank B.S.C. (AUB) as per the Central Bank of Kuwait (CBK) requirements. During the meeting, all the items on the assembly's agenda were approved.
Attended by KFH`s Board of Directors, the Fatwa and Sharia`a Supervisory Board, the executive management, analysts, economists and representatives of media and press, KFH explained various technical and legal aspects, the legal framework of the acquisition and its effects on KFH, its shareholders and customers as well as the banking system and the national economy. It also discussed the expected quantitative and qualitative benefits of acquisition, with a review of financial safety indicators of capital adequacy, asset quality, profitability, liquidity, challenges, fundamental risks and process of conversion of Sharia non- compliant assets.
The deal supports the national economy and the banking sector
Kuwait Finance House( KFH) Chairman, Hamad Abdulmohsen Al-Marzouq, said: “Given KFH’s ongoing aspiration to grow its business, maximize the returns for its shareholders, the continuous quest for more favorable opportunities that are able to diversify investments and income and expand KFH’s activities, the Board of Directors holds this meeting to discuss the acquisition of Ahli United Bank B.S.C. (AUB), and explain the most prominent aspects of the deal and the expected returns from the new entity."
He added: "In the last five years," KFH" has witnessed a major transformation in its activities and effectiveness. Thankfully, we managed to translate the vision and mission of "KFH" seeking to lead the global development of Islamic financial services, which was reflected in positive indicators, both in terms of profitability or asset quality.”
Al-Marzouq explained: “Beside the trust that the Board of Directors receives from the General Assembly, it is responsible for exploring the future of KFH and the banking sector, focusing on sustainable growth by examining the possibility of expanding the bank’s activities, taking into account the limited markets in which the bank operates and the related risks. In addition, the Board tackles restructuring the quality of revenues by relying on stable operating revenues instead of fluctuating investment revenues. Based on the foregoing, KFH`s board of directors appointed three international consultants three years ago to study achieving this vision and the above-mentioned goals. The studies recommended the strategic expansion either through acquisition or merger as this activity is one of the most important ways to create a global giant entity out of the narrowness of the local market. Furthermore, the local and international neutral consultants have studied the financial positions for many local and regional banks that may achieve the above vision and enable KFH to provide stronger resources and create more stable entity. This may be achieved through an exchange of the best expertise and capabilities, building more efficient ability to meet customer needs, raising KFH`s share in the local and global markets and ensuring its long-term growth. According to the consultants ’recommendation, AUB was the best option. It should be noted that some major shareholders such as Kuwait Investment Authority (KIA) also carried out their own studies through mandating independent international consultants. Their studies were also consistent with the same result as that of the KFH consultants.
He emphasized that this strategic step is in line with global trends towards giant entities, as the global economy recorded $ 4.1 trillion M&A deals during 2018. This was not limited to the major banks and financial institutions, but M&As were a pivotal element in various sectors and areas. At the regional level, there have been more than a dozen banking cases heading towards consolidation.
“As a historic step, the Central Bank of Kuwait and the Central Bank of Bahrain agreed to start the process of the KFH`s acquisition of "AUB", according to the determinants after completing the due diligence process. This acquisition represents a powerful engine for growth and prosperity in the future of KFH, providing access to many new markets in Britain, UAE, Oman, Iraq and Egypt and strengthening the position of KFH in its current markets. The deal will give the bank an opportunity to access regional markets with a population of over 430 million people and a median annual per capita income of approximately $42,000 on the basis of purchasing power parity. The deal also would turn KFH into a direct investment and banking destination, reducing group costs across its markets, enhancing the efficiency of resources allocation and increasing profitability.” Al-Marzouq added.
He further explained:“In the early stages of the process, KFH established a logical framework for the research, study and evaluation through studying the deal’s feasibility in collaboration with major international and local consulting houses. During the General Assembly meeting, the results and assessments will be presented which confirm the feasibility of the deal. The Central Bank of Kuwait also appointed McKinsey International Company, which carried out extensive analyses of cash flows, risk calculation, pressure tests, acquisition risk assessment to ensure that a dividend is achieved for shareholders. There were field visits to KFH and AUB. Moreover, McKinsey reviewed the studies carried out by the Kuwait Finance House and the plans for the transfer of Sharia non-compliant assets”.
“KFH’s acquisition of AUB brings many benefits in terms of improving profitability. Studies prepared by consultants have shown that the expected increase in future earnings per share as a result of this acquisition (EPS Accretion) will be the highest compared to the acquisition deals in the Gulf region and the Middle East. In addition, the merger will have positive effects for KFH shareholders due to the expected increase in profits and dividends.” Al Marzouq said.
Furthermore, Al-Marzouq confirmed that the acquisition will improve the quality of the new entity's assets, high capital base, liquidity levels, and capital efficiency at rates that exceed the regulatory requirements. The deal will also generate the largest Islamic banking entity in the world in terms of assets, as KFH will occupy leading deserved position with a value of assets of about $ 101 billion, and shareholders ’equity of $10.5 billion as of the end of September 2019. Being the largest Islamic bank in the world, KFH's ability to finance development projects will increase thanks to its financial resources that foster innovation and development in the Islamic banking industry, as well as the increase in national manpower after the acquisition. In this regard, KFH's policies are totally committed to preserving and developing existing national manpower, whether in Kuwait or Bahrain.
He said: "I am pleased to present to you, within the agenda items, a set of reports on the acquisition deal prepared by global and local consultants in addition to the report of the auditor on capital increase and the report of the Fatwa and Sharia Supervisory Board on the acquisition. All these reports are supported by facts and confirmed numbers to ensure the integrity of the acquisition. "
Al-Marzouq thanked colleagues at KFH and all the advisors and bodies that supported the success of the deal and thanked the scholars and members of the Fatwa and Sharia Supervisory Board, who discussed the project in all its aspects in the light of its solid historical experience and practical supervision of the transformation of National Bank of Sharjah into an Islamic bank and the role of its former members in the transformation of Ahli United - Kuwait and KIB. The esteemed body approved the deal, emphasizing its legal integrity, adopting steps and mechanisms of approach to converting traditional assets in line with Sharia principles, expanding the circle of Sharia transactions and providing a more robust Sharia alternative to the shareholders, depositors, customers and all societies in which the group operates.
Al-Marzouq also thanked all the regulatory authorities that supported the deal in Kuwait and the Kingdom of Bahrain, foremost of which is the Central Bank of Kuwait and the Central Bank of Bahrain.
He said: "I hope that Allah Almighty will crown our steps and endeavors for the good of the country, in a way that achieves the insightful vision of His Highness, Emir of Kuwait Sheikh Sabah Al-Ahmad Al-Sabah, to turn Kuwait into a distinct financial hub, and to maximize Kuwait's leadership locally and globally in leading the Islamic finance industry and pushing it forward.”
Al-Marzouq added that KFH appointed Al Shall Consulting Company to act as a local financial and economic consultant and analyze the strategic goals of KFH. As a result, Al Shall concluded that the acquisition of AUB will achieve macroeconomic benefits, support Kuwait's vision of 2035 and improve its competitiveness as a financial hub. Consequently, Kuwait will be the headquarters of the largest Islamic bank in the world, in addition to its global presence and spread which will contribute positively to achieving the vision of Kuwait, apart from being a turning point in the Islamic finance industry.
He explained that this contributes to improving the entity's revenues from external sources and goes ahead in developing Islamic banking given its ability to employ the best talents and spending on research and development, adding that the financial safety indicators for the new entity are within the safe range along with profitability, liquidity, capital adequacy and market risks.
“Kuwait has two huge development projects, the first is a New Kuwait for 2035, while the second is related to increasing the production capacity of the oil sector to 4 million barrels per day. Since both projects require significant financing resources, major banking units can play a leading role in providing the funding required for these projects. Among them is the new entity which will be one of the most prominent funders and supporters of national development projects. " Al-Marzouq added.
The first digital bank in Kuwait
In order to achieve KFH’s digital transformation strategy, improve its services and products, while enhancing its role as a global leader in innovation, the new entity is able to boost KFH’s leadership in terms of innovation in digital banking services, and to convert AUB Kuwait into a fully digital bank as directed by CBK. Thus, efforts would be focused on offering innovative digital services and banking products, Al Marzouq said.
He emphasized that KFH places great importance on digital transformation in light of the high expected returns. Given the high cost of the digital transformation in banks, the acquisition would reduce costs and help overcome any obstacles to this project. Recent studies and experiences have proven that the digital transformation is in the interest of the customer, achieving a distinguished banking experience for customers, and enabling the new entity to gain higher returns in the future.
He added that through the customer-centric approach, the new entity will be able to ensure high benefits for its customers, while providing more banking services and establishing healthy competition within the Group. Furthermore, the acquisition brings accumulative value and benefits to shareholders and employees of both banks.
High Kuwaitization Efforts
On the other hand, studies that KFH commissioned local and international institutions to prepare confirmed that the new entity would enhance the local capabilities and capacities that KFH possesses and help the Kuwaitization efforts, while opening job opportunities for Kuwaiti youth locally, regionally and internationally.
Moreover, Al-Marzouq stated that the percentage of the national manpower in the merged entity will rise to reach about 76.2%, which exceeds the Kuwaitization percentage required by the regulatory authorities indicating that the bigger and more widespread the entity is, the more national manpower it will need.
High profitability and liquidity levels
Al Marzouq said that the share of “KFH” shareholder in the combined entity according to the share exchange ratio between the two entities is 64.7%, while KFH`s share of profits for the fiscal year 2018 reached about 53.1%, which means an immediate increase for KFH`s share owner by about 21.8% .
He stated that the annual compound growth ratio of KFH profitability for the past ten years (2008-2018) was about 3.8% whereas that of AUB for the same period was about 11.1% despite the fact that the volume of its assets to the total by the end of September 2019 was about 38.2% of the assets’ volume of both banks.
He further pointed out that the increased liquidity of the share is, from one aspect, a means for measuring Boursa dealers’ acceptance of the acquisition project, from a second aspect, it supports the capital value of the merged entity and, from a third aspect, it is a privilege for the shareholder due to the facility it provides for easily disposing the share by mortgage or sale.
“The liquidity of “KFH” and “AUB” shares has been constantly risen since the start of 2018 .Along with the start of the practical procedures of the acquisition process in 2019, the liquidity of both shares has been enhanced whereas KFH has achieved an increase by about 96.5% while capital gains rose in one year by about 46%, which is the highest gains of Kuwaiti banks”. Al-Marzouq added.
Due Diligence and Compliance
As part of KFH's keenness to adhere to the instructions of the regulatory authorities and the codes of professional banking behavior, Al-Marzouq emphasized coordination with the Central Bank of Kuwait and the Central Bank of Bahrain regarding the acquisition studies, consultations and due diligence process.
Al-Marzouq stated further that the institutions that were officially assigned to study the acquisition project and perform a thorough examination thereof have all ended in an outcome, which is the feasibility of the acquisition. Such institutions include Ernst & Young, Goldman, Sachs, Alshal Consulting, Credit Suisse, HSBC, PricewaterhouseCoopers, Freshfields Bruckhaus, KPMG and Link Liters. In turn, McKinsey worked as a consultant for the Central Bank of Kuwait and its consultations covered all pivots studied by other consultants and it ended in favoring the feasibility of acquisition and expected that it will lead to not only a bigger but also a better banking entity. Moreover, the Central Bank of Kuwait stated also in a press release in October 2019 that out of his passion for verifying the feasibility of the project and its added value for KFH, the banking sector and the national economy, it has entrusted McKinsey, which is specialized in acquisitions and mergers, with studying the proposed acquisition process in parallel with the studies conducted by KFH.
Added to that, Al-Marzouq has presented what was mentioned by the Central Bank of Kuwait after reviewing all studies that covered the acquisition project, the most prominent of which is that of McKinsey assigned by CBK. This consulting entity has conducted the required study in a sufficient detail in cooperation with CBK team and over about 30 weeks, during which it analyzed extensive data of both respective banks and their subsidiaries. Further, an on-site and off-site inspection of the files of a great percentage of financing operations has been made in order to verify the quality of assets.
Further, other professional institutions have given opinions that support the acquisition project. Such professional institutions include, but not limited to, the two global credit rating agencies: Moody's and Fitch, which mentioned that the acquisition will be positive in favor of KFH, enhance its business, increase its diversity, support its profitability and the total credit quality, provide privileges from the potential economies of scale and increase credit granting opportunities. In addition, there are other specialized financial entities; e.g. EFG Hermes, which indicated the feasibility of acquisition.
Healthy and balanced competition
Regarding local competition, he pointed out that the new entity acquires 31% of the market share at the level of the banking sector with its two conventional and Islamic divisions against 26% by KFH before the acquisition. This remains within the acceptable limits that do not adversely impact the state of competition. Given the portion of the new entity in the Islamic division would increase from 51% for KFH before acquisition to 66% in the new entity, CBK directed KFH to keep the entity of AUB-Kuwait separate so that it can be a digital bank.
The General Assembly meeting
The ordinary General Assembly agenda items have been approved. The agenda comprised the following items, First: Hearing the Sharia Fatwa and Control Committee report on the acquisition of Al-Ahli United Bank and transformation of its business activities to sharia compliant business including subsidiaries, Second: review and approve Board of Directors report on the acquisition of Al-Ahli United Bank, Third: Approve the assets evaluation report prepared by global consultants Credit Suisse and HSBC and approve the fair swap price of shares i.e. 2.325581 of Al-Ahli United Bank shares for 1 KFH share, Fourth: approve tangible assets appraisal conducted by one of Capital Markets Authority’s approved appraisers, Fifth: sanction Kuwait Finance House listing in the Bahrain Stock Exchange and authorize the board of directors or its nominees to determine the execution date of the decision and adopt all necessary procedures in this respect.
Furthermore, the Extraordinary General Assembly agenda items have been approved, comprising, first: approve Board of Directors recommendation concerning Kuwait Finance House full acquisition of Al-Ahli United Bank shares through the exchange of shares with a swap ratio 2.325581of Al-Ahli United bank shares for 1 KFH share. The said decision shall be subject to the approval of Al-Ahli United Bank extraordinary general assembly on the full acquisition of Al-Ahli United Bank shares based on the determined ratio and authorize the Board of Directors or its nominees to introduce the acquisition presentation and fulfill the requirements of the regulatory authorities in Kuwait and Bahrain, third:approve the Board of Directors recommendation to increase Kuwait Finance House authorized capital to KD1,117,648,920/200 (one thousand one hundred seventeen million six hundred forty eight thousand nine hundred and twenty dinars and two hundred fils) by issuing 4,200,000,000( four thousand and two hundred million shares) and authorize the board of directors to dispose share fractions. Shares shall be allocated to shareholders registered in Al-Ahli Bank of Kuwait shareholders register on the date set for the execution of the acquisition based on the exchange price of 2.325581 of AUB shares against each KFH share, and authorize the board of directors to determine the execution date, issue capital increase shares, take all necessary procedures to execute the capital increase procedures based on the determined acquisition execution date, fourth: approve the amendment of Article 8 of the Memorandum of Association and Article 7 of the Articles of Association.