Kuwait’s banks maintain strong momentum

With growth in the Kuwaiti banking sector hitting double-digit figures in 2014 − reaching its highest rate in the last seven years – momentum is set to continue this year, despite uncertainty surrounding the broader economy.

The total assets of banks in Kuwait rose 12.2% year-on-year (y-o-y) to KD66.4bn ($220bn) in 2014, according to July report from the Central Bank of Kuwait (CBK). A major driver of growth was international activity, which accounted for more than a fifth of business, the CBK noted, helping to reduce reliance on local revenue sources and strengthen overall industry stability.

Governor of the CBK, Mohammad Al Hashel, said that asset quality within the banking system had visibly improved over the last few years, with the gross non-performing loan ratio dropping to a historic low of 2.9% in December.

The value of credit facilities, which rose 6.4% to KD30.8bn ($102bn), also contributed to 2014’s robust growth.

However, the industry also faces headwinds from the broader economic picture. Kuwait’s continued reliance on oil income represents a major long-term issue that has only been exacerbated by the rapid decline in oil prices since mid-2014, affecting the entire economy. In addition, the low oil price has the potential to slow forward momentum on the government’s five-year Kuwait Development Plan, which was passed by parliament in February.

Meanwhile other challenges in the sector include a lack of placement options for the large amounts of liquidity currently held by most banks, and the unavailability of timely statistics on the market as a whole.

Maintaining momentum

Despite broader economic uncertainty, momentum has continued in the banking sector so far this year. The National Bank of Kuwait, the oldest and largest bank in Kuwait, said profits in the first half of the year climbed 12.8% y-o-y to KD163.4m ($541.6m) thanks to improvements in the operating environment and tenders for large infrastructure projects. The second largest player, Kuwait Finance House, reported a 14.1% rise in net profits to KD62.3m ($206.5m) during the same period.

In a July report, ratings agency Fitch said that a significant increase in public infrastructure investment will help drive growth at the country’s eight listed banks.

“The rated commercial banks  ... are expanding lending under favourable operating conditions as the Kuwaiti government taps its exceptionally strong fiscal and external position to maintain high levels of public spending”.

Rising profitability has also created considerable opportunities for expansion. In May, ABK announced a $150m deal to acquire a 98.5% stake in Piraeus Bank Egypt (PBE) from Greece’s Piraeus Bank. After securing approval from the Central Bank of Egypt in July, ABK is awaiting final approval from the Egyptian Financial Supervisory Authority. The deal will enable the bank to expand in the fast-growing Egyptian market through PBE’s 39-branch network.

Key role for construction

With the state planning to develop new rail links and upgrade its roads, seaports and airports, construction is set to surge in Kuwait over the coming years. Planned developments are worth an estimated $123.6bn, according to MEED, outpacing Qatar ($113.8bn), Oman ($29.6bn) and Bahrain ($25bn). In an analysis of the 100-largest construction contracts in the GCC in 2014, Kuwait came in third after the UAE and Saudi Arabia, based on the combined value of projects in the pipeline.

Kuwait’s Central Tenders Committee said in April that it had awarded an estimated $5bn of new tenders during the first three months of the year, most of which, it said, were for energy projects. 

In its findings, Fitch said the knock-on benefits of Kuwait’s infrastructure surge are likely to extend to the financial services sector. Corporate lending is set to expand, offering high interest revenues and lower loan impairment charges, improving asset quality and providing a high reserve coverage ratio.

In addition, growth will be bolstered by ongoing diversification strategies and a greater emphasis on retail lending and small and medium-sized enterprises (SMEs). “We also expect stronger margins due to more opportunities domestically and the banks' diversification strategies, mainly targeting growth in the retail and SME sectors and regional expansion,” the ratings agency’s July report said. “Fitch believes that the banks' prospects are brighter compared with the past when they had typically lagged regional peers in performance.”