Kuwait: Credit where it is due

The financial health of Kuwait’s banking sector has improved markedly since the height of the global financial crisis, when falling asset prices had a negative impact on balance sheets and a number of institutions faced rising numbers of non-performing loans. Today, banks are well capitalised and reporting increased profits.

In July 2010 there were early positive signs from the IMF’s assessment of Kuwait’s financial sector. As part of its research, the global lender carried out a “stress test” of the banking system, calculating the effect of various adverse events – such as a drop in oil prices – on bank capital adequacy ratios (CARs). The IMF concluded that the “banking system could broadly withstand significant shocks given its comfortable capital and liquidity buffers”.

In May 2010 Kuwait Financial Centre released the results of its own stress-testing analysis, which focused on exposure to the real estate and financial services sectors, assuming that asset values might fall by up to 30%. The investment bank concluded that, although “current CARs are safely above the limit, the sector is still vulnerable to declines in asset values in two of the country’s most important sectors, real estate and financial services”. The IMF was of a similar opinion, concluding that a deterioration of 40% of performing loans to real estate and construction businesses would result in CARs at five of Kuwait’s banks falling below the 12% minimum required by the country’s central bank.

Setting aside such hypothetical scenarios, however, financial results for 2010 and the first quarter of 2011 indicate a return to stronger profits for Kuwait’s banks. National Bank of Kuwait (NBK), the largest bank in the country, reported annual net profits of $1.08bn for 2010, compared to $945.2m in 2009. In March 2011 the CEO of NBK, Ibrahim Dabdoub, told Reuters that he expected profits to be similar in 2011, saying, “Overall our bottom line will be similar to the $1.1bn of last year, which is not bad.”

Gulf Bank announced in February that its net profit was KD19.06m ($69m) in 2010, compared to a net loss of KD28.07m ($102m) in 2009. In March Al Ahli Bank of Kuwait (ABK) reported that its net profits had increased by 36% to KD53.2m ($193m) in 2010. In May the credit rating agency Capital Intelligence (CI) upgraded ABK’s rating to A- from BBB+. According to CI this was due to the bank’s improved liquidity, which was the result of a substantial increase its capital base in 2010.

Commercial Bank of Kuwait (CBK) announced earlier this year that it had earned a net profit of KD40.5m ($147m) in 2010, compared to KD146,000 ($529,000) the previous year. This annual report was followed by first-quarter results, released by the bank in April. Although operating profit amounted to KD24.7m ($89m) for the first three months of the year, much of this was allocated to provisions. As a result, first-quarter net profits were only KD1.3m ($4.7m).

In a press release, the bank’s chairman, Ali Yousef Al Awadhi, noted that CBK had decided to set aside additional provisions beyond the regulatory minimum. However, this move was perhaps an exception, with provisioning levels declining overall in the sector in 2010. As NBK noted in its 2010 annual report, sector net profits grew by 58% year-on-year during the first three quarters of 2010, with this “largely the result of lower provisioning needs after the large build-up that followed the crisis”.

Although Kuwait’s banks appear to be operating on a solid footing in 2011, concerns remain, primarily with respect to slow growth in lending. According to KIPCO Asset Management Company, credit growth remains stagnant, with loan portfolios at the country’s banks growing by just 1.7% in 2010.

Gulf Bank’s CEO, Michel Accad, addressed this issue when he spoke at “Kuwait Conference: Financing Development, Developing Finance”, a two-day meeting run in partnership with the Ministry of Finance in Kuwait City in April. In his remarks, Accad attributed the slow growth in lending to a lack of suitable projects, rather than an inability of banks to lend.

However, as the government begins to implement its National Development Plan, it is likely that businesses and the government will increasingly turn to local banks for financing, creating demand for any idle capital. Indeed, the banking sector appears to be well positioned to take advantage of any profitable investment opportunities that may arise.