Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Country reportsApril 1 2014

Competition hotting up in resurgent Kuwaiti banking sector

With performance starting to pick up again in the Kuwaiti banking sector, and strong growth potential both in the domestic market and in neighbouring Iraq, the small country is finding itself the focus of a growing number of lenders, with competition among them growing fierce.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Competition hotting up in resurgent Kuwaiti banking sector

There is a cautious optimism in the central financial district of Kuwait City these days. The country’s banks have absorbed their share of the global financial crisis over the past few years and the memory still looms large. But in among the tight cluster of skyscrapers that house most of Kuwait’s major banking players, there is a sense that green shoots are now emerging.

Profitability for some banks is rising and several avenues for new business are showing promise. But challenges also remain in this small country sandwiched in the middle of one of the most volatile regions on the planet. Probably most importantly, the lending environment in Kuwait is showing signs of easing as banks start to see more positive signs coming from the country’s economy.

According to the newly appointed National Bank of Kuwait (NBK) group CEO, Isam Al-Sager, credit growth in Kuwait has been picking up gradually over the past two years. “Growth in 2013 hit 8% in December, and we expect the pace to pick up further in 2014,” he says. “Consumer lending should grow at double-digit rates while corporate lending has been improving thanks to optimism that government spending on large projects is finally getting into gear.”

Stiff competition

Mr Al-Sager replaced the long-standing Ibrahim Dabdoub at the helm of NBK following the company’s recent general assembly meeting. And the announcement was accompanied by NBK reporting a 2013 net profit of $844m, which is an increase of 6.5% excluding exceptional gains recognised in 2012 on the consolidation of Boubyan Bank. The group’s total assets reached $66bn as of the end of 2013, up 12.8% compared with 2012.

Ozgur Kutay is the CEO of Citibank Kuwait and he highlights that credit growth in the Kuwaiti banking industry has been modest in recent years. According to Mr Kutay, for the full year of 2013, credit growth was about 3.3%. “This is nowhere near to the break-neck pace in the pre-2008 period when annual credit growth sometimes reached 40%,” he says. “Lending to the public sector continues to improve, but remain weak until there is a significant recovery in private sector credit, which makes up more than 90% of total bank lending. In the near term, this seems unlikely with private credit growth stuck at about 5%.

“This results in a stiff competition and shrinking margins between the banks pursuing only creditworthy borrowers in the market. The right risk-reward metrics will highly likely be reached again soon on the back of the [US Federal Reserve] tapering, resulting in less liquidity for emerging markets as a whole. On the flip side, the weak loan growth has allowed the loan-to-deposit ratio to stabilise at less than 80%.”

The rise of the Islamic banking sector in Kuwait has added a new dynamic into the market and banks engaged only in traditional banking now face strong competition from rivals in the Islamic sector.

“Kuwait has one of the longest banking traditions in the Gulf and has been home to many strong banking franchises both in the Islamic and traditional segments,” says Mr Kutay. “We believe Islamic banks have an important niche in the Kuwaiti market and their market share is quite strong based on product innovation and footprint including easy accessibility for their client base.

“Many banks have sought a presence outside Kuwait into the Gulf region or beyond that into the Middle East and north Africa [MENA]. Some even sought opportunities outside the MENA region into growth markets such as Turkey or Malaysia.”

Looking for business

Despite the understandable caution from Kuwaiti banks on lending, the search for the right opportunities continues and competition is fierce to land the best deals in the commercial banking sector. The acting CEO of Commercial Bank of Kuwait (CBK), Elham Mahfouz, says that her company was very cautious and more selective due to the process of building up provisions for the investment, corporate and later the international portfolio, since late 2008.

“The market has been affected after what happened in 2008 worldwide,” she says. “The investment companies in Kuwait have been affected totally; the bigger and the larger companies, whether Islamic lending or normal, plus the smaller ones. The major companies have gone into restructuring. We have been with one of them in the restructuring and they are surviving and doing well.”

Ms Mahfouz says the bank is engaged in commercial lending and it is actively looking for business. But she is keen to convey the bank’s need to select only the right business opportunities at this point in time. “At the end of the day, I have to keep my portfolio, as much as I can, clean, and [I have to diversify],” she says. “So there are certain areas... I am trying to avoid [such as] real estate, for example, and share lending.”

Ms Mahfouz believes the oil industry is an attractive sector in the commercial banking sphere, but warns against too much focus on this one key industry for Kuwaiti banks. “Oil is the main commodity for Kuwait and many of the GCC [Gulf Cooperation Council] countries, so if you are linked in everything to oil, you have a situation if the oil prices drop," she says.

And, according to Ms Mahfouz, CBK is also setting its sights beyond the domestic market, mainly in other GCC countries, which also present good opportunities for growth. “A major contribution to our business is corporate lending locally and retail banking, but we also go internationally now, selectively. For example, [we are involved in] a project in Saudi Arabia to expand the airport.”

Price wars

The high level of competition among Kuwait’s many banks, both local and foreign, is something that Ms Mahfouz is well aware of in the country today. Kuwait has about 10 local banks, plus foreign banks from countries such as the United Arab Emirates, Qatar, France, the UK and the US. And in this increasingly crowded market, the various players are all looking for a slice of the same pie.

“Everyone is trying to take a piece,” she says. “Mainly, they are thinking about Iraq in the future… at the same time they are looking at business opportunities in Kuwait for the projects coming up by the government, or regional infrastructure projects. Mainly power stations, oil, the water works treatment, you have a lot coming through. 

“The foreign banks here are cutting… prices,” she adds. “We see it coming. And we see it on the projects when we bid as local banks together on certain projects, especially if these foreign banks have relationships with the customers that are coming to do the projects, such as the South Koreans or the Chinese, in other parts of the world.”

And this strong level of competition also stretches into the field of human resources, where it can be a struggle for local banks to hold onto staff when international banks come calling – a situation familiar in many local markets around the world. “They [international banks] take the good staff,” says Ms Mahfouz. “They take them especially when they have a certain level of experience of two to three years, and they have a good background, studying finance at university, or proper training, starting the [chartered financial analyst programme] or a Masters degree.”

Firm but fair

The Central Bank of Kuwait recently approved the structure of the Basel III capital adequacy standard and the transitional phase of its implementation, aligning the country with the new international standards on regulation. Whereas the relationship between banks and authorities over Basel III compliance can become quite difficult in areas such as Europe, Kuwait's central bank appears to have more harmonious ties with its institutions.

Ahmed Zulficar, deputy CEO of Ahli United Bank, believes that for Basel III, there has been very good coordination between the Central Bank of Kuwait and the country's financial institutions. “[The central bank] formed a steering committee and consulted on it,” he says. “It interacts with the banks. Basel III is going to be implemented in 2014. Banks would like to have a gradual implementation as per the Basel timetable. Banks are prepared and banks are providing figures for the central bank.

“The Central Bank of Kuwait exerts strict regulations on the banks and has always been proactive. In 2008, it immediately issued the law to guarantee customer deposits and the financial stability law has been issued. The central bank also had meetings with banks to see what could be done to achieve financial stability. It is in contact with the banks to oversee what’s happening.”

Regional opportunities

The calm and stability inside Kuwait could sometimes make it easy to forget that the country sits in the middle of an extremely volatile region, with military conflicts regularly raging nearby. But there are also opportunities for Kuwaiti banks in some of these markets, both in natural resources and in the infrastructure sectors.

“Despite some security threats obstructing full stabilisation, Iraq has one of the highest oil reserves in the world and requires many investments in the energy, power and infrastructure areas,” says Citi’s Mr Kutay.

“Iraq has a relatively large population and years of neglect resulted in a large domestic need for retailing, real estate, healthcare and other services… Iraq naturally presents a great opportunity for the Kuwaiti businesses as well as the banks to expand because of the above factors. This is an increasing trend we have been observing recently. Citi opened a representative office in Iraq in 2013 and we are also keen to leverage the business links between the two countries and overall in the region.

“Syria, on the other hand, is experiencing a prolonged civil war, but with no particular direct or indirect effect on the region’s banking industry in the foreseeable future.”

So, as Kuwaiti Banks head further into 2014, there are encouraging signs that the market is picking up, although it is some way away from pre-crisis growth levels as yet. But the move into a period of strong green shoots is also tempered for the banks by increasingly fierce levels of competition to traditional banks from international players and new Islamic banks, potentially threatening the market share of traditional players. And with increased competition at home, Kuwaiti banks are increasingly looking abroad for new business, particularly in the GCC, but also further afield beyond their home region.

The banks in Kuwait do, however, appear well prepared for the implementation of Basel III, which will add to the prestige and stability of the sector internationally. And while it remains difficult to predict the future of troubled countries in the Middle East, the prospect of new business from markets such as Iraq and Syria remains a strong draw for all in the market.

Was this article helpful?

Thank you for your feedback!