* Isam al-Sager to replace veteran Dabdoub
* Appointment promises stability, policy continuity
* But growth in Kuwait may be difficult
* Has been underperforming some big Gulf rivals
* Faces strategic choice on foreign expansion
By Sylvia Westall and Mirna Sleiman
KUWAIT/DUBAI, Feb 18 The new chief executive of National Bank of Kuwait, the country's largest commercial bank, will grapple with a sluggish home market as he fends off competition from dynamic Gulf rivals.
NBK, the fifth-biggest bank in the Gulf, with $66 billion in assets at the end of last year, said on Sunday that veteran banker Isam al-Sager had been appointed its new group CEO, in an internal transition that had been planned for years.
The 58-year-old will take over next month from Ibrahim Dabdoub, who held the position for three decades. Sager, who has served as Dabdoub's deputy since 2010, has worked at the bank for more than 30 years.
NBK plays a major role in Kuwait's economy, and the larger-than-life character of Dabdoub, 74, has helped shape the business environment, speaking out against policy paralysis in the government.
While Sager's appointment is seen as a sign of continuity at the bank, in which the Kuwait government has a 5 percent stake, it is not certain how he, a Kuwaiti, unlike Palestinian Dabdoub, will address some strategic issues.
"Al-Sager's most valuable asset is his familiarity with the bank's internal politics and Kuwait's complicated political bottlenecks," said a person close to the bank's operations.
Sager may need to consider whether to concentrate more on the bank's local market or expansion overseas, he added.
"That's the biggest challenge. Do you want to retain the bank's global strategy or do you want to bring it closer to home and get it sucked into the state's internal politics?"
Sager joined NBK in 1978, became CEO of its Kuwait business in 2008 and was promoted to deputy group CEO two years later; his family, one of Kuwait's most prominent business families, helped to found the bank in 1952.
Sager, who holds a bachelor's degree in business administration from California State Polytechnic University, could not immediately be reached for comment on his appointment.
Described by people who know him as a quiet, low-key operator, he looks unlikely to match Dabdoub's public profile.
Despite Kuwait's oil wealth, its growth has been held back for years by political instability and red tape, making it a less dynamic environment than other Gulf states such as the United Arab Emirates and Saudi Arabia.
Persistent tensions between the cabinet and parliament have held up reforms aimed at diversifying the oil-reliant economy and a 30 billion dinar ($106 billion) development plan for big infrastructure projects. There were some signs last year that projects might be getting underway, but they remain just signs.
"There's been talk of government projects being initiated for a number of years now and they haven't really got off the ground," said Andrew Parkinson, analyst at credit rating agency Fitch. "That is a real limitation for NBK and other Kuwaiti banks."
Kuwait's economic headwinds mean Sager may find it difficult to squeeze out faster growth in NBK's domestic market, which contributed 78 percent of net operating income in 2013.
NBK missed analysts' forecasts last month when it reported a 48 percent year-on-year tumble in fourth-quarter net profit to $142 million, though it said its full-year earnings reflected improved confidence in the local economy.
"The most important issue facing the whole banking sector in Kuwait, in which NBK has the lion's share, is how to create new opportunities for growth and take the initiative in credit expansion," said Abdulmajad al-Shatti, former chairman of Commercial Bank of Kuwait.
This is because credit growth in recent years has been driven by retail customers receiving rising public sector wages, Shatti said. With state finances increasingly vulnerable to any steep fall in oil prices, the government has started to consider ways to rein in its spending growth, which could limit that source of profits for local banks.
If development projects move ahead this year and the government increases capital spending, that will offer significant opportunities for NBK, said Alexios Philippides, an analyst at Moody's Investors Service.
"A top priority for NBK should be to maintain its strong asset quality, when faced with continuing elevated credit losses within the Kuwaiti banking system, as the system continues to absorb legacy problem loans and awaits the implementation of its development plan," he said.
If growth inside Kuwait languishes, NBK could look to opportunities in the Gulf and the larger Middle East. It already has an Egyptian subsidiary, Al Watany Bank of Egypt, and a major stake in Turkish Bank.
In 2012, Dabdoub told Reuters that NBK aimed to derive 50 percent of its net profit from overseas branches by 2020, up from 29 percent then.
But NBK faces tough competition abroad from energetic regional rivals such as National Bank of Abu Dhabi (NBAD) , which has a fast-growing home base, and government-backed Qatar National Bank (QNB).
NBAD has been expanding its network aggressively in the Middle East and Asia, while QNB has made acquisitions in Egypt and raised its stakes in foreign affiliates in Tunisia and Iraq. The two banks have been performing better than NBK by some measures.
NBK's return on equity, a measure of profitability, was 9.7 percent in 2013, down from 12.8 percent in 2012, according to Thomson Reuters data. NBAD had an RoE of 14.4 percent last year, down from 16.5 percent in 2012, while QNB's ratio has been running near 20 percent.
The contrast can be seen in the banks' share prices. NBK has performed well, rising 11 percent, since Reuters quoted sources as saying in mid-January that Sager was set to succeed Dabdoub. But it is up only 7 percent since the end of 2012, compared with a 62 percent leap for NBAD and a 42 percent gain for QNB.
Sager "is one of the new generation, so there could be a new way of seeing things, but I don't think there is going to be any significant change" in policy, said an analyst at a Middle East-based investment bank, who declined to be named.
"NBK is a very conservative bank, and I think that will remain the strategy going forward. The main challenge is how they are going to be able to maintain growth if the Kuwaiti market doesn't pick up." (Additional reporting by Ahmed Hagagy; Editing by Andrew Torchia and Will Waterman)