Kuwait's 2035 Vision is based around the country becoming a regional finance heavyweight. Now its banks are moving apace to make that a reality, with healthy bottom lines and innovative approaches to lending, retail and fintech. James King reports.


The good news keeps on coming for Kuwait’s banks. Over the past 18 months almost every lender has registered strong growth to their key performance metrics, even though the wider economy continues to develop at a suboptimal pace. 

With capitalisation levels high, liquidity abundant and profits up, bankers in Kuwait City have good reason to be positive about the future. As the government continues to spend on infrastructure, and with an expected boost to the public sector wage bill in its latest budget, Kuwait’s banks are likely to benefit from a full suite of growth opportunities in 2019.

By the end of the third quarter of 2018, the capital adequacy ratio of Kuwait’s banking system came in at 18%, according to figures from the Central Bank of Kuwait. Meanwhile, the adoption of IFRS9, in addition to regulatory provisioning, saw loan loss reserves reach about 284% of problem loans by the end of the year. In terms of profitability, the sector boasted a return on average equity of 10.4%, while its return on average assets came in at 1.3%.

Noteworthy performances

Strong though these numbers are, some of the individual performances behind them are even more remarkable. The country’s largest lender, National Bank of Kuwait (NBK), is a case in point. Net profits surged by 15% in 2018 to reach a record high of $1.2bn. “We achieved considerable progress and growth, the result of a focus on our diversification strategy across products and services, our geographical reach, and a commitment to digital transformation to enable future growth,” says Shaikha Al-Bahar, deputy group chief executive of the NBK.

Indeed, noteworthy performances can be found across the sector. Al Ahli Bank of Kuwait (ABK) saw its net profits increase by 18.1% year on year in 2018, while its operating income was up 7.5%. Total assets increased by 4% while customer deposits grew by 6%. Encouragingly, its non-performing loan [NPL] ratio was 1.78% – below the sector average – while NPL coverage was well above 300%. “ABK enjoyed a strong year in 2018. Operating profits exceeded Kd100m [$329.26m] for the first time in the bank’s history,” says ABK chief executive Michel Accad.

The health of Kuwait’s banking sector is such that the stories underpinning these results are diverse. Healthy corporate and consumer banking divisions are, in a number of cases, being buttressed by the strong performance of Kuwaiti lenders’ regional operations. Meanwhile, the digitisation of the country’s banking sector is continuing to move rapidly, contributing to greater efficiency across the wider system.

“Kuwaiti banks’ net profitability will remain broadly stable at high levels, with sector-wide net income to tangible assets at just over 1.3% over our outlook period. Net profitability improved in 2018 to 1.3% from 1.1% for the year 2017, driven by wider net interest margins and healthy business growth,” says Nitish Bhojnagarwala, vice-president and senior credit officer at rating agency Moody’s.

In 2018, credit growth as a whole rebounded in December in Kuwait to reach a 13-month high of 4.3%, from the 3.1% peak registered in 2017, according to figures from the NBK. In the first half of 2018, lending to businesses increased by 5.3%, which was also an increase from the 3.3% achieved over the same period in 2017. Indeed, activity in Kuwait’s corporate banking market has been robust. For instance, the country’s major telecoms operate, Zain, successfully closed a $700m revolving credit facility to refinance an $800m deal arranged in 2014. This transaction involved a number of local, regional and international banks.

Public-private partnerships

Meanwhile, Kuwait’s public-private partnership market is generating good traction. The awarding of the development of the $1.6bn Umm Al Haymann wastewater treatment plant is a case in point. A consortium consisting of German group WTE Wassertechnik and Kuwait-headquartered International Financial Advisors will develop the project company and operate and maintain the facility over a 25-year period. Purified water from the facility will be sold to the government, which will act as a guaranteed buyer.

As projects of this kind grow in frequency, the opportunities for Kuwait’s banks will develop in tandem. With the sophistication of these deals increasing, it is opening up lucrative opportunities for specialist banks such as ABK to prosper. 

Indeed, ABK has carved out something of a niche for itself in the domestic and regional corporate financing space. Though it lacks the scale of larger institutions, Mr Accad is looking to gain an edge for the bank through its know-how. “On the corporate side we focus on the value-added products and services, such as structured finance offerings. On most large government projects, we bid to be the lead manager,” he says.

In the region, ABK’s Dubai International Financial Centre office, which the bank opened in May 2018, was the conduit for the lender’s role as mandated coordinating lead arranger on Dubai Aerospace Enterprise’s $800m credit facility secured in 2018.

International forays

Indeed, the growing internationalisation of Kuwait’s banking sector is emerging as a key theme for the sector. ABK, for instance, made a highly successful acquisition in Egypt in 2015. Meanwhile, larger players including the NBK continue to expand and develop already mature international footprints and business lines. In 2018, the NBK’s international operations contributed 30% to the lender’s bottom line.

“International markets are a significant part of our diversification strategy, which in addition to focusing on expanding our product and service offering also looks at growing in all existing geographies,” says Ms Al-Bahar.

“During the past year we have made important progress in this area as demonstrated by the expansion of our branch network in Saudi Arabia, our entrance into the wealth management market in the country, and greater interaction with customers’ parent companies in China, among other initiatives,” she adds.

This trend will deepen with the expected completion of a merger between Kuwait Finance House (KFH), the country’s second largest bank, and Ahli United Bank of Bahrain (AUB). If completed the deal would be the first notable cross-border banking deal in the Gulf region. Given KFH’s strong global outlook, particularly in its capacity as a market maker in global sukuk, along with AUB’s impressive regional footprint, the new entity would boast strong regional and international credentials.

Retail boost

Closer to home, Kuwait’s retail banking market is expected to receive a boost in 2019. The draft budget for the 2019/20 financial year includes an increase for public sector wages, while the Central Bank of Kuwait lifted the ceiling on personal loans in November 2018. Previously the central bank imposed a personal loan limit of 15 times the borrower’s salary or a maximum of Kd15,000. Under the new rules, loans can be as high as 25 times a borrower’s salary or a maximum of Kd25,000.

“Growth in the retail segment has been strong because the central bank has lifted the ceiling for consumer loans,” says Elham Mahfouz, chief executive officer of the Commercial Bank of Kuwait.

Household borrowing increased by 6% in December 2018, mainly driven by growth in housing loans. But the battle for the Kuwaiti consumer market among the banks is intensifying. This contest is mainly playing out in the digital arena, where most lenders are looking to deploy cutting-edge innovations and product and service offerings to lure in tech-savvy nationals and white-collar expats alike. As a result, the pace of change is frenetic, though it is bringing tangible benefits for the consumer.

“Boubyan Bank has introduced many innovative new products and services: near-field communication on credit and debit cards; cardless withdrawals; civil ID updating on ATMs; interactive teller machines; mobile bill payments and more. All of these innovations have been designed to make customers’ lives easier,” says Adel Al-Majed, chief executive officer of Boubyan Bank, one of Kuwait’s leading sharia-compliant financial institutions.

As Kuwait’s digital banking journey progresses, the country’s lenders are also looking at blockchain technology to augment their operations. “Domestically, we joined both the Swift gpi and Ripple networks and became the first [in Kuwait] to use blockchain technology for cross-border transfers, allowing our customers to enjoy real-time remittances,” says NBK’s Ms Al-Bahar.

Al Ahli Bank of Kuwait and KFH have also joined NBK in using the Ripple network. In a market that is highly integrated with the regional economy, and which contains a large number of migrant workers, there are clear benefits to introducing blockchain technology to services such as cross-border payments and transfers. For larger institutions with extensive regional footprints, this kind of commitment to new technology is seen as a vital means of driving operational efficiencies.

“At an operational level, we made significant investments in digitalisation projects across geographies, among which was a new mobile banking platform for Egypt, Iraq, Bahrain, Jordan and the United Arab Emirates. Moreover, in Iraq a new data centre was established to host the core banking system, while for the NBK Wealth Management business in Saudi Arabia, [new] IT [infrastructure] and a software roll-out was delivered for Riyadh and Jeddah,” says Ms Al-Bahar.

Fintech progress

Meanwhile, Kuwait has also felt the pressure of adapting to fintech. In November 2018, the central bank created the country’s first fintech regulatory ‘sandbox’, whereby fintech groups are permitted to test their products and services in a secure environment over the course of one year, before being tested on their readiness to enter the market. Several other Middle Eastern jurisdictions have done the same, with Abu Dhabi, Dubai and Bahrain offering their own versions of a fintech sandbox offering.

Beyond technology, Kuwaiti banks are continuing to play a role in the development of the country’s burgeoning capital markets. Burgan Bank, Kuwait’s second largest lender by total conventional assets, successfully issued a Kd100m subordinated Basel III-compliant bond in the local debt markets at the end of 2018. It was the first transaction of its kind to be executed by a Kuwaiti bank in the local market. Following the transaction, the chairman of Burgan Bank, Majed Essa Al-Ajeel, said: “The issuance of the Kd100m bond in the local market is in line with Burgan’s ongoing strategy to diversify its source of funding and its commitment to lead the continued development of the local debt capital market.”

Transactions of this nature will be vital if Kuwait is to realise its ambition of becoming a financial and commercial hub in the coming years. At present, the country’s local capital markets are relatively underdeveloped, though important progress has been made in recent times through various regulatory and legislative reforms.

“Part of Kuwait’s 2035 Vision is for the country to become a regional and global financial hub and Kuwait has a solid foundation in this regard. Generally speaking, the development of capital markets is an important pillar to economic competitiveness, which is also key to Kuwait’s vision,” says Ms Al-Bahar.

Looking ahead, the stellar performance of Kuwaiti banks in recent times shows no sign of abating. Though the domestic economy is expected to cool somewhat from its performance in 2018, this almost exclusively reflects the impact of oil production cuts on the hydrocarbon economy. Beyond this, non-oil project spending is expected to receive a boost, while the consumer segment should also move in a positive direction in 2019.

Backed by strong balance sheets and with opportunities for growth domestically and across the wider region, Kuwait’s banks look set to continue their impressive development arc.


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