Kuwait’s banks are slowly recovering from the global financial crisis and bankers are optimistic for 2015. However, issues remain, including high exposure to the real estate market, outstanding debt settlements and a funding shortfall for the country’s SMEs. 

In Kuwait City’s financial district, confidence among the country’s banks is high. In recent years, lenders in Kuwait have emerged from the financial crisis with stronger balance sheets, more effective risk management systems and an eye to the longer term prospects offered by the domestic economy and regional markets.

These positive developments and improving sentiment have been underpinned by a less fractious political environment, with both the government of Kuwait and its parliament working together more effectively. In turn, this has expedited a number of long-awaited infrastructure and development projects, helping to stimulate growth in a number of sectors.

Kuwait’s banks are now seeing strong growth and expectations are high that 2015 will be even better. According to the Central Bank of Kuwait, total assets for local lenders hit Kd55.5bn ($184bn) by December 2014, an increase of about 7.7% year on year. Meanwhile, net profit for the sector grew by 14% last year, according to data from the Kuwait Stock Exchange. This growth has gone hand in hand with increasing strength; the sector-wide capital adequacy ratio sits at 18.8%, according to the Central Bank of Kuwait, while 89% of the banking sector’s capital consists of Tier 1 capital.

Star performers

Stand out performers for the year include Gulf Bank, which posted a 10% growth in net profits, while the Commercial Bank of Kuwait registered 109% growth from 2013. Burgan Bank, the country’s third largest lender by total assets, enjoyed 207% growth in net profits, reaching Kd61.8m, while the National Bank of Kuwait (NBK), the largest lender by assets, enjoyed 10% growth over the period. According to research from NBK, banking sector profits accounted for 41% of Kuwait's total corporate earnings in the first nine months of 2014, an increase of 6% over the same period from 2013.

This situation is a stark contrast to the darkest days of the global financial crisis, when Kuwait’s lenders were hit particularly hard. High exposure to real estate markets and associated investment companies saw sector-wide non-performing loans (NPLs) soar during the downturn, reaching as high as 11.5% in 2009. Yet, the strong support of the Central Bank of Kuwait and in some cases its sovereign wealth fund have enabled a number of lenders to transform their fortunes in the intervening years.

“Following the financial crisis, there has been a debate over the relative merits of either allowing a bank to fail or devoting the time and energy to a restructuring. There are arguments for both cases and the discussion will continue. I think Gulf Bank is one example of where restructuring a bank has been a stunning success story,” says Cesar Gonzalez-Bueno, who was appointed chief executive of Gulf Bank, the country’s fourth largest lender by assets, in March 2014.

“Through an effective combination of support from the shareholders, the Kuwait Investment Authority and the regulator, the bank has turned itself around,” says Mr Gonzalez-Bueno. “The previous management did a fantastic job of creating a fortress balance sheet. Gulf Bank’s NPLs ratio has reduced from a high of about 30% to 3.2% today.”

History lessons

The confidence of lenders such as Gulf Bank is warranted. Most Kuwaiti banks, in partnership with the Central Bank of Kuwait, have developed world-class risk management systems to shield against future uncertainties. In June 2014, ratings agency Moody’s recognised Gulf Bank’s efforts in generating a successful risk management model, as well as the replenishment of its capital buffers. “Now, because we are healthy, a world of opportunity is in front of us. But we will not forget our history and the lessons we have learned,” says Mr Gonzalez-Bueno.

The Commercial Bank of Kuwait, the fifth largest lender in the country by total assets, has enjoyed a similar revival. With an NPL ratio of close to 25% in 2009, the bank has now slashed this number to 0.8%. According to chief executive Elham Mahfouz, the next phase of the bank’s growth will focus primarily on opportunities inside Kuwait.

“At this stage I can tell you we are a local bank. [For example], we reactivated our international lending over the past two years by soliciting business from Kuwait. We thought about buying a bank in Turkey and Egypt before the crisis, but now we are focused on [the domestic market],” he says.

Nevertheless, it has not been all good news for the banks. In particular, some are still working through debt settlements, including with the so-called Family Fund. Established in April 2013, the fund is designed as a debt relief law permitting the government to purchase conventional banks and investment companies’ personal loans, acquired prior to March 2008, that were still outstanding by June 2013, as well as writing off the interest. As such, debt settlements related to the Family Fund, as well as some legacy corporate debt, have restrained credit growth over the past 12 months.

“Bank credit growth was moderate in 2014, averaging 7.2% for the year, led by household lending, though that performance was held back somewhat by debt settlements related to the Family Fund,” says Elias Bikhazi, NBK’s group chief economist.

Concentration risk

Another longer term issue remains concentration risk. Although this situation is improving quickly, the majority of the country’s banks, as well as the private sector more broadly, are still facing a high level of exposure to the real estate market and investment companies in Kuwait.

"The real estate sector tends to dominate private sector investments and this is due to a lack of choice. Meanwhile equity trading has declined as new regulations have delivered much-needed transparency. So what is needed is more privatisation in government-dominated economic sectors in order to invigorate the economy and provide the private sector with new investment options,” says Mazin Al-Nahedh, chief executive of Kuwait Finance House.

Profitability ratios since 2008 have been relatively low compared with other regional markets as a result of the higher general and specific provisions taken by banks. Data from Kamco, a local investment company, reveals that Kuwaiti banks achieved a return on average equity and return on average assets of 0.9% and 7.7%, respectively, in the 2013 financial year. In comparison, the average results for Gulf Co-operation Council (GCC) banks for the same period were a respective 1.8% and 12.8%.

Meanwhile, competition in the sector is growing. With 11 local and 12 foreign banks operating in Kuwait, developing market share is a challenge. “Though Kuwait’s banking sector isn’t suffering from excessive competition, the situation is changing quickly. We saw an increase in competition in 2014 and we should be preparing for a more competitive environment moving forward,” says Mr Gonzalez-Bueno.

Foreign presence

In early 2014 the Central Bank of Kuwait relaxed restrictions on foreign lenders opening more than one branch in the country in an effort to stimulate growth and spur increased lending in the country. When first enacted, analysts predicted minimal take up from foreign lenders in light of the long-term slowdown in government project spending. Yet, now that government project and infrastructure development is accelerating, the scope for international lenders to expand their presence in the country has increased.

“The challenge we face today is the tough competition in the country’s banking sector. This challenge is shared by all lenders and this is partly driven by banks from the GCC region that have a presence in Kuwait. This makes pricing very competitive,” says Ms Mahfouz at the Commercial Bank of Kuwait.

As such, most lenders are now playing to their strengths, revising their strategies and looking to build on the positive momentum generated in 2014. For the Commercial Bank of Kuwait, niche success has been achieved servicing Kuwait’s migrant workers.

“We are doing particularly well in the sphere of labour accounts. We started in 2002 when the other banks wouldn’t look at this sector based on the low income of migrant workers. We have three dedicated branches to handle these labour accounts because they have specific needs. Now the other lenders are trying to compete in this space but we have established the infrastructure already,” says Ms Mahfouz. “It is contributing good profits. It accounts for about 14% to 15% of our total retail income.”

Consumer growth

Meanwhile, the consumer sector has also been a strong source of growth for most lenders. By December 2014, credit growth to households hit 12.7% year on year, significantly outperforming credit growth as a whole, which reached 7.2%, according to data from the NBK. “In the retail sector we are also hoping to target fresh Kuwaiti graduates. Even though they start with small salaries, they will eventually require home financing and credit cards, and a number of other products and services,” says Ms Mahfouz.

Other players, including Burgan Bank, have gone from strength to strength through international expansion. With operations in Turkey, Tunisia, Iraq, Algeria and Jordan, Burgan has found success through geographical diversification, as well as in its home market. Increases to total loans and deposits were recorded across every market in the 2014 financial year, excluding Kuwait, which recorded a marginal decline in deposits. Similarly, Iraq and Tunisia were the exceptions in a healthy picture for operating profit, which increased substantially in Turkey, Algeria and Kuwait, and to a lesser extent, Jordan.

Kuwait’s banks, in partnership with the authorities, are now pushing hard to address a funding shortfall for the country’s small and medium-sized enterprises (SMEs). In line with other GCC energy exports, the Kuwaiti authorities see SMEs as an effective way to promote the development of the non-oil private sector. The challenge, however, is finding an appropriate framework for banks to lend to these businesses. To this end, the government has established a Kd2bn national SME fund, known as the National Fund for the Support and Development of SMEs.

“The challenge of catering to SMEs isn’t unique to Kuwait. It is a problem common to both developed and emerging markets around the world. It is so difficult to assess risk and banks must have a strong understanding of the local market, as well as their SME clients. It is much more difficult,” says Mr Gonzalez-Bueno. “The national SME fund is an excellent mechanism as it brings a non-market view to SME lending, while enhancing the banks’ capacity to absorb risk.”

The fund will finance up to 80% of any loan provided to the enterprise, while the banks will provide the additional 20%. At the time of writing, only Gulf Bank had officially signed up to the SME debt fund. However, a number of other lenders were in discussions to sign a partnership, including Kuwait Finance House.

Once fully functioning, this is expected to open up a new growth avenue for most lenders in the country. Meanwhile, as a number of the country’s larger infrastructure and development projects enter the latter stages of their execution, many larger corporates will be in need of significant financing. This bodes well for Kuwait’s lenders. With the country’s economic growth slowly improving, and with capital adequacy, liquidity and cost-to-income ratios at world-beating levels, the prospects for Kuwait’s banking sector are bright.


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