National Bank of Kuwait won plaudits for avoiding lending to troubled investment companies - unlike some of its rivals - but its conservative approach is winning few fans these days.
NBK posted a 4.4 per cent decline in net profit for this year's second quarter to 65.8 million Kuwaiti dinars from last year's second quarter. Analysts had been hoping for profit of 82.1m dinars, according to data from Bloomberg News.
"That's way below what we expected," said Naveed Ahmed, a financial analyst at Global Investment House.
The bank's shares have underperformed the Kuwait Stock Exchange index for much of the year, falling 12.9 per cent to 1.14 dinars since the start of the year. The stock price finished unchanged in trading yesterday.
Bad debt has decreased, and now represents 1.61 per cent of the bank's loan book. But total assets have also fallen, to 13.6 billion dinars from 13.9bn at the end of March.
Stimulus measures are expected to spur credit growth for Kuwaiti banks, but not without caveats, analysts from Moody's Investors Service wrote in a research report.
"Kuwait's government has announced an extensive investment programme [worth $100 billion] for the next four years, but bureaucracy and legacy exposures of distressed investment companies may subdue the economic recovery," the ratings agency said.
NBK had been more conservative than many of its peers in lending to Kuwait's investment companies, and its asset quality was much better, but growth remained sluggish, said Paul-Henri Pruvost, a financial analyst at Standard and Poor's.
"For the whole Kuwaiti banking system, banks have been quite reluctant to lend for the past year. Our base-case scenario is that there might be some shift towards increased lending in the coming quarters because of the pipeline of government projects," he said.
"But 2011 will remain a year of modest credit growth. The emphasis will remain on protecting liquidity and making sure their books are cleaned up," Mr Pruvost said.