Local lenders are now experiencing a period of fiscal recuperation in 2022, following the global coronavirus pandemic and the corresponding slump in oil prices that rocked Kuwait’s economy.
With the more or less complete reopening of the domestic economy in February — following a brief Omicron scare — and Russia’s invasion of Ukraine, the rise in the country’s oil revenues to 14-year highs augurs well for the economy, raising the prospect of higher consumer confidence and government spending, which will provide a boost for retail and corporate lending.
“We are cautiously optimistic and confident that the recovery will gather strength over the coming months, as higher vaccination rates have enabled the gradual and safe rollback of most Covid-19 restrictions,” says Sulaiman Al-Marzouq, deputy CEO for National Bank of Kuwait (NBK), the country’s largest lender by assets. “We expect this improvement to continue as life returns to normal, especially if oil prices continue to experience an upward trajectory.”
Other opportunities for Kuwaiti lenders in the year ahead include increases in interest income, with the Central Bank of Kuwait (CBK) set to follow the US Federal Reserve in raising interest rates in the coming months. Meanwhile, the prospect of a new mortgage law, designed to facilitate a much-needed increase in homeownership among Kuwaiti nationals, promises to open up a new lucrative revenue stream for banks.
Yet, the new mortgage law, like the country’s badly-needed debt law, remains at the mercy of the country’s fractious political system, and therefore cannot be baked into banks’ forecasts for the years ahead.
And while the Kuwaiti banking landscape has, in recent times, faced minimal disruption from either new entrants or the consolidation trends witnessed across the region during the past five years, the prospect of one or more new digital entrants from 2023 onwards may reignite talk of mergers and strategic alliances.
Dialling back precautions
Like its peers across the Gulf and around the world, the CBK cut interest rates to an all-time low of 1.5% at the beginning of the pandemic in March 2020, mirroring rate cuts put in place by the Federal Reserve.
The CBK acted swiftly to ease pressure on banks by cutting the minimum limits for lenders’ liquidity coverage ratios, net stable funding ratios and regulatory liquidity ratios, as well as reducing capital adequacy rates to 10.5% from 13%. The bank also increased loan-to-value ratios for land, real estate and construction purposes, and cut the risk weight for lending to small and medium-sized enterprises (SMEs), which make up around 90% of the country’s registered companies.
For their part, Kuwaiti banks in March announced a moratorium on loan payments running until the end of September 2020, in a bid to boost public spending. The CBK announced its own six-month loan moratorium for Kuwaiti retail clients from April 2021, financed by the government. Given that most beneficiaries of the scheme were Kuwaiti public employees that had continued to receive their salaries throughout the pandemic, the expiration of the scheme had a minimal impact on overall asset quality.
Non-performing loans fell during 2021, dropping from 2.02% at end-2020 to 1.4% at the end of December, according to CBK data. Loan coverage remains high, increasing from 171.7% to 310% over the same period.
“Kuwait’s financial sector has weathered the crisis well, benefiting from the central bank’s prudent regulation and close supervision, and the strong buffers before entering the crisis,” said the International Monetary Fund in the concluding statement of its Article IV Mission to the country in October.
Even in the depths of the crisis, Kuwaiti banks have remained well-capitalised. The sector’s capital adequacy ratio stood at 19% at end-2021, unchanged on 2020 levels, comfortably higher than the CBK’s mandated pre-Covid minimum of 13% and the 10.5% minimum recommended under Basel III standards. The sector’s liquidity coverage ratio and net stable funding ratios stood at 183% and 111% respectively, well above the CBK’s minimum requirement of 100% for each.
Given the resilience of the sector and the country’s improving economic outlook, the CBK announced in October that it would begin to unwind most of the measures taken to protect banks in March 2020, restoring regulatory requirements to their pre-Covid levels on a staggered basis by January 2023.
However, the central bank has maintained the reduced risk weight for credit extended to SMEs at the 25% mark, in a bid to further support SME lending.
The CBK announced in January 2021 that it would once again permit banks to pay annual dividends, provided that capital adequacy ratios remain above pre-agreed levels. The bank extended this to semi-annual dividends from February of this year.
As The Banker went to press, CBK governor Mohammad Al-Hashel — winner of The Banker’s Central Bank Governor of the Year Award for the Middle East in 2019 — was due to step down from his post after 10 years in the role. His successor has yet to be named, with the bank declining to comment on the timing of the new governor’s appointment.
After declining by 48.7% in 2020, banks’ profits rebounded in 2021, with earnings rising by 56.6% in the 12 months to end September, according to Arzan, with just one lender, Warba Bank, reporting a drop in profits for the period.
Deposits drop
In addition to the return of profitability, one of the most notable developments of 2021 was the first annual drop in overall banking deposits recorded since 1999. CBK statistics issued in February, reported by local media, showed that total deposits fell to Kd44.56bn ($146.49bn) at end-December, down 1.58% from the end of 2020.
While private-sector deposits slipped by 0.4% during the year, most notable was a 7.2% drop in government deposits, with some government-related entities — notably local pension fund, Public Institution for Social Security — reported to have withdrawn deposits from local banks in search of higher yields elsewhere. The move prompted a flurry of bond and sukuk issues from lenders to make up the shortfall; NBK alone tapped markets four times between December 2020 and September 2021, culminating in a $1bn issue in September.
With government finances facing less pressure as a result of higher oil prices, deposit growth is set to resume in 2022, according to Ali H Khalil, CEO of investment bank Kuwait Financial Centre (Markaz). However, not all banks are as confident that government deposits at local banks will return to previous levels so quickly, even as government revenues increase.
“Even as interest rates rise in line with the Federal Reserve, I don’t think the returns offered by banks will be sufficient for such funds to be replaced,” says Abdul Salam Al-Saleh, Boubyan Bank’s CEO for corporate banking, financial control, treasury and legal affairs.
Credit continues to grow
Greater flexibility on loan regulations, combined with lower interests and the moratoria introduced by banks and the CBK, have helped maintain credit growth in the banking sector, albeit at a slower rate than in the pre-Covid period.
“The growth in personal loans, albeit from a small base, was particularly significant in 2021 as people wanted to live again and start spending after the worst of Covid, leading to a rise in personal borrowing,” says George Richani, group CEO of Ahli Bank Kuwait.
Net credit facilities grew by 4.2% to Kd51.8bn in 2020, according to CBK data, the slowest percentage rise since 2016. Analysis by Arzan shows that banks’ loans increased by 5.8% in the 12-month period to September 2021.
“We expect credit growth to accelerate in 2022, supported by business lending and household credit, due to the diminishing impacts of the pandemic,” says NBK’s Mr Al-Marzouq.
“Spending levels and consumer confidence continue to power ahead, albeit at a moderate pace compared to 2021. Corporate lending is likely to expand after a lacklustre performance in 2021, as the operating environment improves and project awards continue to pick up. That should have a positive reflection on business activities,” he says.
Mr Al-Saleh says that while the credit market had been challenging during the pandemic, the bank expected to record “either double-digit growth or, in the worst case scenario … high single-digit” growth in the coming year.
Dreaming of mortgages
Of particular interest for lenders is the prospect of a new mortgage law, which aims to simplify the house-buying process for Kuwaiti nationals, unlocking a valuable new revenue stream for banks.
Under existing legislation, newlywed Kuwaitis receive an interest-free loan of Kd100,000 from the state-owned Kuwait Credit Bank (KCB) intended to help them either build, buy or renovate a home. In recent years, however, the KCB has suffered from reduced liquidity due to the increase in housing requests, leading to a large backlog of Kuwaiti nationals requiring financing.
And while the government approved an increase in the bank’s capital by Kd300m in late January, the increase is seen as insufficient to tackle current housing needs.
While mortgages are currently offered by local banks, financing for Kuwaitis is restricted to citizens that have at least two income streams. According to research by Markaz, the proposed new mortgage law will enable local banks to provide loans of up to Kd140,000 to citizens with just one income stream, with the government paying interest on the first Kd70,000 on behalf of the borrower.
“Once the National Assembly approves the mortgage law and the debt law, that will have a significant impact on stimulating credit growth, especially mortgages, as we expect great demand for new banking products once the law is passed,” says Mr Al-Marzouq.
The passage of the new mortgage laws in 2022 is far from a given though, due to the antagonistic relationship between the national assembly and the government. The bodies have failed to renew Kuwait’s debt law in the five years since it expired, undermining the credit rating of the country and its lenders.
Consolidation on hold
With banks returning to profit in 2021 and the economic outlook for 2022 much improved, pressures on banks to consolidate have abated. The wave of mergers that has swept much of the Gulf Co-operation Council (GCC) in the past five years is once again set to leave Kuwait unimpacted.
“There’s a natural tendency for banks to come together when there is earning pressure, especially in an overbanked country [like Kuwait], in order to create efficiencies of scale and scope,” says Mr Richani. “But when the banks are doing well, of course, they don’t think of consolidation.”
After years of discussions, January 2020 saw Kuwait Finance House (KFH) shareholders give their approval for the acquisition of Bahrain’s Ahli United Bank (AUB) — the first cross-border bank acquisition in the GCC for several years and a significant consolidation within Kuwait, with AUB’s local subsidiary being one of the biggest contributors to its overall loan book.
Just months later, however, the deal was derailed in the immediate impact of the coronavirus. The CBK advised KFH to conduct a reassessment of the acquisition once the impact of the pandemic has subsided. Yet, even as the economy returns to a semblance of normality, the outlook for the deal remains uncertain. KFH did not respond to questions about the status of the deal in early 2022.
Yet Boubyan’s Mr Al-Saleh said that should the KFH–AUB deal go through, it may once again raise pressure on other lenders to seek similar tie ups.
Such pressure is only set to increase with the entrance of new digital banks as soon as next year. In February, the CBK released new guidelines for the licensing of new digital entrants. Would-be new digital lenders have until June to submit licence applications, with the bank making a decision on which players to license by the end of the year.
“If the central bank were to license two or three new entrants, that would take the number of banks operating in the country to 12 or 13,” says Mr Richani. “This added competition could push some of the smaller banks that are getting increasingly squeezed into potentially merging with another bank.”
