Complex Made Simple

What do the numbers say about the Kuwaiti banking system?

When the National Bank of Kuwait (NBK), the country’s biggest publicly traded lender, revealed its Q3 results at 73.7 million Kuwaiti Dinars (AED895.4m), or 7.3 percent increase QoQ for a total 9-month profit of 238 (AED2.89bn) million, it reflected how robust lending, a mainstay of banking, is in the country.

“Credit quality in Kuwait is not a key concern for us with most banks results indicating a general improvement in credit quality over the past two years,” Elena Sanchez-Cabezudo and Ahmed El Shazly, analysts at EFG Hermes, said in a note on NBK results.

So what is the outlook for Kuwait’s banking system?

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Moody’s says that it is stable

In March 2017, Moody’s Investors Service labeled Kuwait’s banking system as stable, boosted by state financing of government projects, and having a spill over economic effect on private banks.

“A record amount of projects under execution will create corporate lending opportunities for banks. We expect 6%-7% credit growth over the outlook horizon of 12 to 18 months,” says Alexios Philippides, an Assistant Vice President at Moody’s.

“Banks maintain strong buffers against potential (loan) losses, in the form of solid capital adequacy and a growing cushion of general provisions, which amounted to around 4% of gross loans as of end-2016,” adds Philippides.

Moody’s anticipated that the banking system’s net income would be at 1-1.2 per cent of average assets.

“Market funding reliance will increase, according to Moody’s, as deposit growth will be sluggish due to low oil revenues. Core liquid assets, which represented 28 per cent of total assets at end-2016, will remain ample however,” it said.

Liquid assets

Kuwaiti banks are asset-rich and rank third in the GCC with $206 billion, with Saudi banks coming in second place with $611bn and the UAE leading the pack with $723bn (AED2.66trn), according to the UAE national press agency WAM this October.

In terms of individual bank assets, the First Abu Dhabi Bank topped the list with assets of $170bn, National Bank of Saudi Arabia came second with $120bn, and National Bank of Kuwait third with $85bn.

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According to a recent study by the First Abu Dhabi Bank, the UAE’s banking system comprising of 48 banks affords great financial solvency and reaps the fruits of an open economic and financial policy, which has attracted many of the world’s financial institutions and earned it AA ratings from multiple agencies including Fitch, S&P and Moody’s.

Kuwait has not had to borrow and has done well for itself lending internally despite some challenges. So how does it do it?

Low debt issuance

An IMF country report in January 2017 said that Kuwait had thus far lagged behind other GCC countries in debt issuance through bonds, although it expected that up to $10bn could be raised on international markets this year.

It said that financing in 2015/16 relied almost exclusively on the use of resources in the General Reserve Funds (GRF), which Kuwait’s sovereign wealth fund ‘Kuwait Investment Authority’ (KIA), manages for investments often outside the country.

“Domestic debt issuance has been ramped up in recent months,” the report said, adding that since most of these loans are for housing, “excessive domestic borrowing could, however, crowd-out private sector credit and adversely affect growth.”

“Global markets could provide better terms and greater scope for borrowing than domestic markets. The global financing environment remains favourable for now, and Kuwait has a very strong credit rating (AA),” the IMF report said.

More banks… more lending options

The Oxford Business Group (OBG) said in a 2017 report that the Kuwaiti banking sector allowed foreign banks to open more than one branch, in a move that will pressure domestic players to be more competitive.

It said that, as of 2017, 11 Kuwaiti banks were licensed to operate in the country, led in size by NBK, while 12 foreign banks had operations in Kuwait, including western institutions HSBC, BNP Paribas and Citibank, and GCC banks like National Bank of Abu Dhabi and Qatar National Bank.

Kuwait also boasts a healthy Islamic banking arm, such as the Kuwait Finance House (KFH), which was followed after its establishment in 1977 by 4 others and combined for 38 per cent of sector assets. NBK has a majority stake in Boubyan Bank, its Islamic banking subsidiary and a growing player in the domestic market.

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Lending picture

Total credit facilities to the local private sector grew from KD33.3bn ($110.1bn) in 2015 to reach KD34.4bn ($113.5bn) at the end of 2016, according to the Central Bank of Kuwait.

OBG says that, with oil staying in its current price range for the foreseeable future, the majority of Kuwaiti banks will witness a year of modest credit expansion.

“The prospects for booking loans are supported by the Kuwait Development Plan, in which the government intends to inject KD4.75bn ($15.7bn) into projects over fiscal years 2017/18. Around half of this funding is expected to come from the government, but the quasi-state-run oil companies and the private sector will make up the remainder, meaning that banks will have no shortage of big-ticket lending prospects over the medium term,” said OBG.

“The government’s ability to continue with its development strategy – thanks to its reserves – differentiates Kuwait from its neighbours, in which major fiscal consolidation threatens financial sector growth.”

Player distribution

OBG, quoting  data compiled by the Kuwait-based Arzan Financial Group, said the two largest banks in Kuwait account for around 50% of total lending, the first being NBK and the second is surprisingly KFH with assets of $54.6bn.

With total assets of $24.1bn, Burgan Bank is Kuwait’s third-largest bank, Gulf Bank is Kuwait’s fourth-largest lender with $18.2bn in assets, and Commercial Bank of Kuwait is fifth with $13.6bn.

The top five banks have a 75 per cent market share and are all publically listed.