Fatah Adour, General Manager, Citibank Kuwait : Interview

Interview : Fatah Adour

How will higher funding costs affect sector liquidity?

FATAH ADOUR: The impact of increased funding costs should be limited in the short term. First, Kuwait enjoys a strong buffer provided by its large sovereign wealth fund, as well as a low fiscal breakeven point compared to the average oil prices witnessed in 2018. This will further strengthen the country’s liquidity position. Second, Kuwait pegs the dinar to a basket of currencies, giving monetary authorities the flexibility to deviate from the dollar when the US Federal Reserve increases interest rates. The Central Bank of Kuwait did this once in 2017.

However, in April 2018 the dinar followed the dollar to maintain competitiveness and keep local savings attractive. If we consider the strong liquidity ratios, this will persist in the medium term. As in any contractionary policy environment, and due to the time lag between rate hikes and the repricing of cash accounts, banks will enjoy an improved net interest margin in the near term.

What is the outlook for loan delinquency rates?

ADOUR: At below 2.5%, the non-performing loan (NPL) ratio in Kuwait is lower than in other GCC countries despite the challenging economic environment brought about by the sharp drop in oil prices since 2014. Indeed, the domestic banking system is in a good health, as it benefits from strong and coordinated regulatory oversight by the Central Bank of Kuwait.

The banking sector also holds impressive capital adequacy ratios due to prudent provisions and the prompt implementation of liquidity coverage ratios, net stable funding ratios and the ninth International Financial Reporting Standard (IFRS 9). Therefore, local banks’ management, robust credit-extension policies and due diligence will maintain NPLs at manageable levels. Additionally, with the systematic implementation of reforms to reflect market costs and reduce subsidies, consumer behaviour will gradually adjust to a more prudent stance in terms of recession-cycle spending, which will prevent NPLs from growing uncontrollably.

How are issuances likely to change in the near term?

ADOUR: The outlook for bond issuances is not very clear. Although we will see transactions coming to the market, rising funding costs and improved liquidity from higher oil prices will decelerate their pace and reduce the number of issuances in the short term. However, implementing IFRS 9 might put some pressure on the required regulatory capital of some banks, necessitating that they raise more capital. In any case, market participants would be wise to forecast a tight balance sheet and plan their issuances accordingly, especially if they believe liquidity will change soon.

What role can technology play in financial services?

ADOUR: The global finance industry has to compete with small entrepreneurs as well as internet giants such as Facebook and Google. However, banks have a key competitive edge: customer trust. Banks will stay around for a long time, but they have to become faster, smarter and more efficient to stay relevant.

This will require an ongoing transformation of the business model, organisational structure, culture and technology infrastructure. Among other factors, players will have to adopt key technologies such as artificial intelligence, automation and blockchain; overhaul digital assets and core banking systems; and employ cloudbased services. For incumbent banks to evolve, they will need to focus on digital transformation, a simpler business mix by geography and products, and better financial returns, which would allow management to divert their attention away from near-term stability.

With a stable, profitable and strong banking system, the Central Bank of Kuwait and domestic banks have an opportunity to take a leadership role in the region and help develop the next generation of finance. The gains could be substantial for both banks, which will gain access to a many-fold-larger global customer base, and their clientele, who will benefit from much lower costs and a significantly improved consumer experience.