Focus on lending: Credit issuance shows promising signs of recovery

Despite the challenging economic environment and ongoing slow demand for credit in the region, Kuwait’s banks saw a slight increase in loan issuance over the course of 2012. According to data from the National Bank of Kuwait (NBK) – the country’s largest bank by assets – by the end of 2012 credit growth had risen by around 5% year-on-year, up from around 1.6% over the course of 2011 and just 0.4% in 2010.

This increase, while slight, was widely considered to be a signal of the sector’s potential for ongoing lending growth. “Banks are eager to extend credit for worthy clients,” said Sami H Al Alanbaee, the manager of the economic research department at the Central Bank of Kuwait (CBK). “The notable increase in credit issuance in 2012 bodes well for future expansion.”

CHALLENGES: At the same time, Kuwait’s lenders face a number of major challenges. While consumer credit issuance has jumped considerably in recent years, the corporate segment remains somewhat sluggish, for a variety of reasons. The majority of most banks’ loan portfolios are made up of corporate credit. On the supply side, for example, as of early 2013 most financial institutions remained wary of issuing credit to local corporates, and particularly to local investment companies (ICs), many of which were hit hard in the wake of the 2007-08 international financial downturn. At the same time, demand for loans has yet to recover to pre-crisis levels. After years of provisioning at the request of the CBK, many local lenders are currently sitting on a substantial amount of liquidity. A comparatively conservative regulatory environment and relatively slow economic expansion across the region in recent years has resulted in few opportunities for lenders to deploy this capital.

POSITIVE PROVISIONING: Despite all of these issues, the long-term outlook for credit issuance in the country is broadly positive. Most local banks have spent the past half-decade provisioning against non-performing loans (NPLs), cleaning up loan portfolios, improving the quality of holdings and implementing new corporate governance and risk management regimes in an effort to ensure that the events of 2007-08 are not repeated. Consequently, the Kuwaiti banking sector is well positioned to take advantage of a slew of major upcoming opportunities.

Perhaps most importantly, local financial institutions are expected to provide the majority of the financing for the government’s KD30bn ($107.1bn) National Development Plan (NDP), which was initially launched in early 2010 and is currently under way. The initiative, which includes a number of large-scale infrastructure projects, has stalled since its launch, though according to the state it is expected to move forward substantially before the end of 2013.

LENDING TRENDS: The trajectory of Kuwait’s credit industry over the past decade is in many ways representative of the development of the regional financial industry as a whole. Lending among local banks ramped up steadily in the early 2000s, driven by low interest rates and rapidly rising real estate prices. During this time, many banks extended substantial amounts of credit to the country’s ICs, which used it primarily to invest in the thriving Kuwait Stock Exchange (KSE) or in property holdings. By 2007 local banks had extended KD22.9bn ($81.8bn) in credit to the local sector, up nearly 43% from KD16.05bn ($57.3bn) the year before, according to data from the IMF and Capital Standards, a Kuwait-based ratings agency. By late 2007 credit growth had been tempered somewhat by the international downturn.

Still, overall bank lending continued to expand over the next three years. By the end of 2008, total local credit issuance had jumped by 19%, to KD27.34bn ($97.6bn). This figure rose further to KD29.35bn ($104.8bn) in 2009, up 7% from the previous year; and KD29.53bn ($105.5bn) by the end of 2010, up just 0.6% from 2009. NBK was the largest lender for much of this period – by the end of 2010 the bank had an outstanding loan book worth KD8.13bn ($29bn), which was equal to just over 27% of total loans, according to Capital Standards. Other major lenders at the end of 2010 included Kuwait Finance House (KFH), with KD7.4bn ($26.4), or just under 25% of total loans; Gulf Bank, with KD3.4bn ($12.1bn), or just over 11% of the total; Burgan Bank, with KD2.7bn ($9.6bn), or 8.8% of the total; and Commercial Bank of Kuwait (CMBK), with KD2.6bn ($9.3bn), or 8.7%, among others.

By the time the downturn hit, most banks’ loan books were heavily weighted in real estate and securities. Indeed, by the end of 2007 real estate-related credit issuance accounted for around 25% of total loans in Kuwait, up from around 22% in 2006. This number continued to grow over the next few years, topping out at around 26% in 2009. Loans to ICs and loans for the purchase of securities, meanwhile, were worth around 11% and 10% of total loans, respectively, at the end of 2007. The rise in NPLs in the years leading up to the financial downturn exerted steadily increasing downward pressure on banks’ willingness to lend. At the end of 2006 the ratio of gross NPLs to total loans was at 4.6%, according to the IMF’s 2012 Article IV Report. This figure had dropped slightly to 3.8% by the end of 2007, before expanding to 6.8% by the end of 2008 and 11.5% by the end of 2009, at which point most local players were in the process of moving capital to provisions in preparation to write off NPLs.

STRONG RESPONSE: The CBK took an aggressive stance in the wake of the downturn, cutting the discount rate from 6.3% at the end of 2006 to 3.75% by the end of 2008 and to 2.5% by the end of 2011. Most recently, in October 2012 the regulator lopped another 50 basis points off the discount rate, bringing it down to 2%. In May 2012, meanwhile, the CBK issued new loan-to-deposit ratio rules for the sector. Previously local banks were required to maintain a maximum loan-to-deposit ratio of 85%. Under the new regulations, however, loan-to-deposit ratios will be calculated based on loan maturities. Banks will be allowed to have a maximum ratio of 100% for loans that mature after one year, and 90% for loans that mature for any period of time between three months and one year. Additionally, the new rules stipulate that banks may take into account other financing sources when calculating their loan-to-deposit ratios, including bonds and sukuk (Islamic bonds).

PROGRESS: The CBK’s actions have had positive results. Banks have worked to reduce their exposure to NPLs – and, in the process, real estate and equities. As of October 2012, NPLs made up about 6.8% of the sector’s total loans, down from 7.3% at the end of 2011 and considerably lower than 8.9% a year before, according to IMF figures. According to a report released in early 2013 by EFG Hermes, a regional financial services firm based in Cairo, NPL coverage throughout the country has improved considerably in recent years, primarily due to write-offs (as a result of provisioning) and, to a lesser extent, recoveries. As of the end of 2012, according to the report, the strongest bank in terms of NPL coverage was CMBK, with a provisions-to-NPL ratio (excluding collateral) of 169%, followed by NBK, at 152%. KFH, meanwhile, had the lowest provisions-to-NPL ratio at the end of the year, at around 62% excluding collateral.

TURNAROUND: As previously mentioned, despite a handful of ongoing challenges, lending has begun to recover in recent years. As of the end of April 2013 total bank credit was at KD27.5bn ($98.2bn), with personal lending making up the largest percentage of lending portfolios, according to statistics from NBK. The banking sector’s total credit issuance to ICs has continued to decline in recent years – as of the end of February 2013 loans to ICs were down by around 20% compared to the same period the previous year.

Personal lending, meanwhile, was up by 17.4% over the same period, according to NBK figures. Finally, lending facilities for the purchase of securities were down around 2.2% over the same period, which is a reflection of both the banking sector’s ongoing wariness about this segment and sluggish activity on the KSE. According to EFG Hermes, Kuwait is forecast to see average overall loan growth of 6-7% in 2013, up from 5% in 2012. Personal lending is expected to be the primary driver of growth over the course of the year. “Personal credit has been quite buoyant recently,” Al Alanbaee of the CBK, told OBG.

While most local banks continued to book heavy provisions through 2011 and 2012, many banks have been simultaneously looking for new investment opportunities in an effort to boost revenues in the coming years. “Kuwaiti banks are well capitalised and ready to lend,” Michel Accad, the CEO of Gulf Bank, told OBG. “It is the demand for loans that is missing.” Indeed, in an effort to book revenues some banks have focused on foreign markets, such as Egypt and Turkey, among others (see analysis). At the same time, the state-led NDP – which will likely require substantial financing – is scheduled to move forward over the coming years. According to an announcement in early 2013, the government plans to spend as much as KD5bn ($17.85bn) on the plan before the end of the same year (see Construction & Real Estate chapter).