Stability of banks strengthen financial sector

October 7, 2018

Anew report just released reiterates the strength and resilience of Kuwait’s banks. The report shows the banking system, which underpins the country’s financial sector, successfully weathered the pressures brought on by the low oil price scenario that prevailed from mid-2014 to the end of 2016.

In his preface to the 2017 Financial Stability Report (FSR), the flagship annual publication from the Central Bank’s Financial Stability Office (FSO), Kuwait Central Bank Governor Dr. Mohammad Al-Hashel noted that banking system in the country remained ‘sound and stable’ during the year under review.

The FSO, which is mandated to regularly examine developments in Kuwait’s financial sector has in the sixth iteration of its yearly report provided an in-depth evaluation of the performance of various components of the country’s financial system. The report noted that stability of the banking system, which dominates and accounts for 88 percent of the domestic financial sector, could be attributed to both internal industry specific factors as well as to broader external operating conditions.

On the internal side, banks entered the low oil price environment in mid-2014 from a position of strength, while on the external front the government’s continued support to capital spending remained a strong support to the banks.

In mid-2014, when oil prices began their precipitous slide, leading to economic sluggishness in most Gulf Cooperation Council (GCC) states, banks in Kuwait, under guidance of the Central Bank, already had a strong footing with low and declining Non-Performing Loan Ratios (NPLR) and high level of provisions built during benign times.

Externally, despite falling revenues during the nearly 30-months of low oil prices, the government decision to sustain capital spending not only shielded the domestic economic environment from external pressures, but also buoyed market confidence that created an environment conducive for operations of local banks. Persistent spending on the government’s side was also made possible largely by drawing on Kuwait’s abundant financial reserves, as well as by borrowing from both domestic and international debt markets, rather than pressurizing local banks.

Using 31 December 2017 as the cut-off date for its review, the FSR noted that as a result of the above factors, the Kuwait banking system posted visibly healthier growth last year. Banks in Kuwait increased their profitability, relative to a year earlier, with the net income of banks, after taxes and on a consolidated basis, increasing by 8.9 percent to touch KD812.6 million.

In the same period, the banks’ consolidated assets increased by 7.4 percent on the back of higher private sector credit off-take and growing investments. Specifically, assets worth KD4.1 billion were added to the banking system, a significant expansion from the KD1.26 billion added in 2016. This took the total assets of banks to KD73.5 billion by December 2017.

Though banks’ investments continued to climb, supported by the greater issuance of sovereign debt within the GCC, the most significant contribution in assets came from banks’ consolidated loan portfolio, which expanded by another KD2 billion and posted a growth of 4.7 percent. This was a marked improvement compared to the meager 1 percent (rise of KD424 million) credit growth in 2016.

Lending to large corporates accounted for nearly70 percent of the total gross credit allocation, followed in a distant second position by household sector at around 25 percent. Despite incentives from CBK to encourage banks to provide loans to Small and Medium Enterprises (SME), this sector accounted for only a little over 5 percent share in overall credit of banks.

A breakdown of household sector loans as of December 2017, reveals that long-term installment loans accounted for 86 percent of all household credit. These loans, usually for periods of up to 15 years, were for purchase of new homes or for repair or remodeling of old residences.

The second largest category of household credit, accounting for 11.5 percent, went for consumer loans to cover expenses related to purchase of consumer durables or to meet education or medical needs. Credit card related loans made up the remaining 2.5 percent of overall household loans.

The report noted that credit to the real estate sector grew by 4.4 percent, a turnaround from the minus 3.4 percent witnessed a year earlier, mainly from a resurgence in residential sector. However, the FSR pointed out that the overall exposure of banks to real estate was significantly greater than what appeared from their direct lending to the sector, as a large chunk of household loans were also used for purchase or refurbishing of private residences.

The combined exposure of banks to the real estate should consider their lending to real estate sector and construction sector, as well as the installment loans to households. When adding up the lending under these three categories, banks’ exposure to real estate accounted for almost half of their entire lending portfolio.

A location-wise breakup of the total loan allocation of KD46.2 billion by banks shows that, as expected, the largest share was to Kuwait, which accounted for a little over KD34 billion or around 74 percent of total loans. This was followed by 10.5 percent in Europe and 9.5 percent in other GCC states, mainly in Bahrain the UAE and Saudi Arabia.

On the investment side, the total investment portfolio of banks at KD12.9 billion registered a growth of 13.6 percent, nearly double the 7 percent witnessed in 2016. This was primarily from the KD7.4 billion that banks invested in government securities amid the growing issuance of sovereign debts by GCC states.

On account of the confidence boost from higher oil prices, consolidated deposits in banks registered a growth of 7 percent to reach KD54 billion in the period under review. Domestic deposits, which accounted for over 78 percent of total deposits, increased by 6.6 percent, while foreign deposits, which improved marginally to nearly 22 percent of total, grew by 8.8 percent. Breakdown of deposits reveals that time deposits accounted for around 64.7 percent of the total deposits, highlighting the stable funding base of the banking system and its capability to provide stability during times of liquidity stress.

The FSR 2017 concluded on an optimistic but cautionary note that though economic recovery, buoyed by higher oil prices and healthy growth of non-oil sector improved the overall operating scenario for banks, the resilience of banking sector would come under pressure if operating environment deteriorated or turned negative for an extended period, especially if a major correction were to take place in the real estate and construction sector.