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Middle EastApril 3 2017

Kuwaiti banks plot steady course for success

Kuwaiti banks are using their strong capital and liquidity position to expand in project financing and consumer banking. James King reports.
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Gulf Bank

A quiet optimism has settled over Kuwait City’s financial district in recent years. Having overcome the challenges of the global financial crisis, the country’s leading banks are now looking to the future in a market that is growing at a reasonable pace.

Though the depressed oil price environment seems likely to persist, Kuwait’s banks have improved their balance sheets and cleaned up their loan books, and are adjusting to this new reality from a position of strength. The government’s commitment to capital spending is also softening the blow by stimulating the wider economy while offering substantial project financing opportunities.

For most banks, 2016 was an opportunity to consolidate this recent success. The capital adequacy ratio for the sector as a whole hovered around 18% in 2016, while non-performing loans (NPLs) were just 2.4% in June, accompanied by loan-loss provisioning of 206%, according to the International Monetary Fund. Several Kuwaiti banks have issued capital-boosting bonds over the past 18 months to meet Basel III requirements and shore up their reserves.

A good performance

“Kuwait’s banks have performed well across the board. NPLs have reduced and capital adequacy has been strengthened,” says Elham Mahfouz, chief executive of the Commercial Bank of Kuwait.

Liquidity, meanwhile, remains comfortable despite the squeeze other regional markets have experienced over the past year. Kuwait’s banks are primarily deposit-funded, and customer deposits accounted for 70% of all liabilities in early 2016, according to ratings agency Moody’s. In addition, liquid banking assets accounted for about 36% of tangible banking assets by the middle of last year. For the country’s biggest lenders, this was an encouraging dynamic.

“Another very satisfactory trend in 2016 was the continuation of strong liquidity at the National Bank of Kuwait [NBK],” says chief executive Shaikha Al Bahar. “We managed to grow our deposit base by 4.5% year on year. We look around the region and liquidity is becoming very scarce and competition on funding is quite fierce.”

Yet key challenges remain. For one, most Kuwaiti banks have high loan concentrations to single sectors, such as real estate, as well as single borrowers, including large family conglomerates that dominate the national economy. A cooling property market – in which the residential home price index fell 11% year on year in the first half of 2016, according to Moody’s – could therefore lead to rising but manageable NPLs.

In response, a number of lenders are quickly diversifying their loan books with a view to increased exposure to sectors of the economy that generate cashflow. “Real estate financing has reduced from about 23% to 24% of our credit portfolio to about 19% today,” says Ms Mahfouz. “We are now focusing on the construction, contracting, trading and services sectors, which all generate cashflow.”

Project financing

Indeed, the scale of the government’s spending plans is creating an abundance of new opportunities for banks’ corporate financing divisions. But the landscape is tough, and Kuwait’s largest and longest established lenders dominate the overall market. As a result, pricing is increasingly competitive, making the value of long-standing customer relationships and quality of service crucial for lenders looking to gain an edge.

“Growth is going to come from government spending and in particular infrastructure development. Projects in the oil and gas sector and civil construction including the development of roads, bridges, housing, hospitals and the new airport all present opportunities for Kuwait’s banks,” says Ahmed Khalid Al-Duwaisan, general manager of corporate banking at Gulf Bank.

Within this mix, some lenders are looking to the higher returns through arranging and lead managing the financing of key developments. But only a select few can do so. “Al Ahli Bank is playing a key role in Kuwait’s project market, not just in terms of financing but as one of the very few lenders that can arrange and lead manage their development from a structure finance perspective,” says Michel Accad, chief executive of Al Ahli Bank of Kuwait. 

Meanwhile, Kuwait’s 2014 law permitting the development of public-private partnerships (PPPs), which came into effect in March 2015, is having a growing impact on the country’s project market. A $20bn PPP project pipeline has been established to date, with $3bn-worth of these projects closed at the time of writing. While the scheme is expected to deliver tangible opportunities to the private sector, it is also providing the country’s banks with a new stream of financing opportunities.

Plant investment

“During 2016, the first PPP project, Al Zour North 1, was completed successfully and commenced operations. This was testimony to the ability of the Kuwaiti market to accommodate and run such projects. NBK was the largest lender under the commercial facility and the only Kuwaiti bank on this deal. We also acted as account bank and local security agent for Al Zour North 1 Independent Water and Power Project [IWPP],” says Ms Al Bahar.

In addition, NBK is supporting the bids of developers looking to secure contracts for the Al Zour North 2 IWPP. This includes an 1800-megawatt gas-fired cogeneration plant and a desalination complex producing 102 million imperial gallons a day, as well as the Kabd Municipal Solid Waste Treatment Project, enabling about 50% of Kuwait’s solid municipal waste to be processed at the facility.

“NBK has so far led the project finance segment in Kuwait and has played a vital role in all recently awarded projects. We expect our market dominance in this segment to remain intact, thanks to the bank’s sizeable balance sheet, high ratings, strong domestic and international relationships, as well as its ability to lead, arrange and manage these large transactions,” says Ms Al Bahar.

Competing for consumers

Beyond project financing, Kuwait’s banks are competing fiercely for market share in consumer banking. This competition is partly stimulating a steep improvement in the country’s digital product and service offerings in the sector, with globally recognised innovations coming to the fore. The sophistication of the market is also a great help.

“Kuwait is a tech-savvy market with a young, sophisticated population. Smartphone penetration rates are among the highest in the world and this makes it a demanding market from a mobile banking perspective,” says Gulf Bank deputy general manager of consumer banking Steven Eliopoulos.

Last year’s relative slowdown in the consumer sector has intensified the competition. Growth in point-of-sale transactions slowed to 5.5% in 2016 from 13.3% in 2015, according to data from NBK. In addition, in December 2016 household lending growth was 6.5% year on year, down from 12.6% in 2015.

This drop off in activity partly reflects a sharper fall in consumer confidence that accompanied the slump in oil prices. It also mirrors the impact of tighter Central Bank of Kuwait regulations implemented towards the end of 2015, which require recipients of consumer loans to provide receipts to ensure the funds are used as intended.

“The first half of 2016 was difficult from a consumer banking standpoint. The impact of lower oil prices had a negative effect on consumer sentiment over the period. There was, for instance, a 45% year-on-year drop in auto sales in January 2016,” says Vikram Issar, general manager of consumer banking at Gulf Bank.

Gulf Bank is one of several Kuwaiti lenders to have invested heavily in its mobile banking proposition in recent years. With most banks looking to the future, there is a common understanding that in a market characterised by a large and growing youth population, digital banking will be vital. In order to capture a bigger share of this all-important demographic, world-class product and service offerings are needed, exemplified by the launch of Gulf Bank’s Blinking to Bank app.

“We are the first bank in the Middle East and north Africa region – and one of the first in the world – to adopt facial recognition technology,” says Mr Eliopoulos. “This is accompanied by fingerprint recognition technology, providing our customers with complete biometric security. We launched the Blinking to Bank app in May 2016, following a total development time of just four months.”

The launch of the revamped mobile banking app won Gulf Bank as many new mobile banking customers between May and September 2016 than it had generated over the previous three years. In addition, it registered a 40% increase in non-financial transactions such as setting up standing orders and adding beneficiaries, and 20% more financial transactions by the all-important Kuwaiti consumer segment.

Nevertheless, capturing the youth market is a challenge for some of Kuwait’s conventional lenders. Young Kuwaitis are increasingly seeking sharia-compliant offerings. “There seems to be a growing trend among the younger population to opt for sharia-compliant banking in Kuwait,” says Mr Accad.

International ambitions

While Kuwaiti banks’ domestic performance remains strong despite the challenges of increased competition and lower oil prices, their regional growth story is equally impressive. And while Kuwaiti banks, including big-hitters such as NBK and Kuwait Finance House, have boasted a regional and international footprint for years, now other lenders are joining in the hunt for higher growth opportunities abroad. Al Ahli Bank is one such example, following its November 2015 acquisition of Piraeus Bank of Egypt.

“Our Egyptian unit achieved profitability after its first year of operation. We expect our profits – excluding foreign exchange gains or losses – to triple in 2017 as we capitalise on a large, growing and underbanked market,” says Mr Accad.

The bank’s strong performance in 2016, during which it achieved top-line growth of 14%, highlights the growing importance of its non-Kuwaiti operations, which include a presence in the United Arab Emirates (UAE). “We will increasingly count on Egypt and the UAE to contribute to both our top and bottom lines. Today, these markets account for about 20% of the bank’s total business, and in the coming years I expect this to move closer to 30%,” adds Mr Accad.

Al Ahli Bank is leveraging its international growth to the benefit of its small and medium-sized enterprise (SME) strategy. Egypt’s central bank has recently passed legislation requiring all lenders to designate 20% of their lending portfolios to SMEs. Though this will be difficult for most to achieve, it is nevertheless incentivising banks in the country to develop comprehensive lending frameworks for this business segment.

Mr Accad sees this as an opportunity for the bank’s operations in Kuwait. “Al Ahli Bank plans to roll out its SME business in Egypt first before transferring this expertise to Kuwait in the coming years,” he says.

Cyber challenges

Looking to the future, Kuwaiti banks are facing a common challenge beyond lower oil prices: cyber security. In early 2017, several banks, as well as the country’s debit card clearing system K-Net, were hit by various hacking attacks. For the most part these included distributed denial of service (DDoS) assaults on bank websites, as well as the K-Net portal. An attempt was also made to break into individual bank accounts at one lender in the country, according to local press reports and private sector sources.

“Cyber security is something Kuwaiti banks are taking very seriously. Cyber attacks on Kuwait have increased very slightly in recent years and the DDoS attack on K-Net is a case in point,” says Mr Accad.

Events in Kuwait mirror the developments in other Gulf Co-operation Council banking markets that have also seen a spike in cyber attacks. The region’s wealth is attracting cyber criminals. “Hackers are increasingly targeting Kuwait because it is such a lucrative market. Average ticket sizes are higher, so the hackers only need to target a single consumer to make it worthwhile,” says Mr Eliopoulos.

Kuwait’s banks are taking these challenges in their stride, however. There appears to be little on the horizon that will dent the quiet confidence of the country’s lenders even as they contend with the shifting sands of a lower oil price environment. The next 12 months look set to deliver the same steady growth that has characterised their success in recent years.

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Read more about:  Middle East , Kuwait