Fitch: Kuwaiti banks continue to see robust growth

However, the banking system may face risks in the form of potential volatility in the regional stock and property markets as well as regional political instability.

'In line with the other GCC countries, the Kuwaiti banking sector continues to benefit from a buoyant operating environment, principally driven by high oil prices resulting in increased government infrastructure spending and general growth in both retail and corporate lending,' says Philip Smith, Senior Director in Fitch's Financial Institutions team.

The banking system's development has also benefited from the regulator's efforts to maintain a stable operating environment. The Central Bank of Kuwait was also the first regulator in the region to implement Basel II at end-2005.

On the other hand, exposure to the relatively volatile regional stock markets and a possible property market bubble might negatively affect performance and could lead to future asset quality problems. In Fitch's view, however, Kuwaiti banks' asset quality is unlikely to deteriorate significantly in the short term. Regional political instability can also be a cause of concern.

The Kuwaiti banking system consists of six commercial banks, three Islamic banks, one specialised bank and five foreign banks. The structure of the banking sector is unlikely to change dramatically in the medium term as banks are in good financial health and stock market valuations are relatively high. The largest bank in the sector remains National Bank of Kuwait (NBK; rated 'A+'/Outlook Stable) but its market share has been falling in recent years as its peers (notably Kuwait Finance House) are catching up by growing aggressively. Competition from foreign banks is likely to be limited to the wholesale sector as they are allowed only one branch.

The Kuwaiti economic outlook continues to be very favourable as public debt is minimal and Kuwait remains one of the largest net external creditors rated by Fitch. Nevertheless, moves towards a more diversified economy would reduce vulnerability to oil price movements and offset geopolitical risks.