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Kuwait bounces backMarch 31 2022

Markaz CEO signals the need for Kuwaiti bank consolidation

The Kuwait Financial Centre, more commonly known as Markaz, is one of the country’s leading investment banks. CEO Ali H Khalil talked to The Banker about the importance of Kuwait’s stalled debt law, the outlook for deposits in the banking sector after 2021’s declines and the likelihood of consolidation in the local banking market.
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Markaz CEO signals the need for Kuwaiti bank consolidation

Q: How serious a problem is liquidity in the economy and the banking sector for the coming year? Will a cash crunch be averted due to higher oil prices?

A: Kuwait’s government owes Kd2.35bn ($7.8bn) in late payments to public entities, according to Ministry of Finance data, due to the lack of liquidity in the Treasury’s accounts. Even in the absence of a new debt law, Kuwait should be able to fulfil its financial obligations, especially with the higher oil prices. The main issue is not the government’s ability to meet its financial obligations, but the depletion of General Reserve Fund assets. The government has been taking several measures to mitigate this, such as raising funds by way of asset swaps with the Future Generations Fund.

The Central Bank of Kuwait has kept a close watch on the soundness of the country’s banks. The sector has remained well capitalised and boasts healthy liquidity levels — 25.4% as of the third quarter of 2021, against a minimum requirement of 18%. The recent approval of a capital increase for the Kuwait Credit Bank to help ease liquidity constraints is expected to underpin solid demand in the residential segment.

Q: Kuwait has been without a debt law since 2017. How significant is the passage of a new law for the economy?

A: In the short term, rising oil prices have eased deficit pressures. Nevertheless, the passage of the debt law will be essential in the long term to manage economic cycles, and to cater to deficit-financing and refinancing requirements of earlier debt issued.

The debt law will aid in diversifying the source of government finances, instil a sense of discipline for government expenditures, increase transparency and disclosures, and would aid in the development of domestic debt markets via a benchmark yield curve, better pricing of corporate issues and so on.

Q: How significant is the fall in deposits recorded by the central bank last year? Are deposits likely to recover in 2022?

A: As per the data provided by the Central Bank of Kuwait, the total deposits stood at Kd44.56bn at the end of December 2021, down by 1.6% year-on-year. This is the first annual decline since 1999, when it decreased by just 0.5% year-on-year.

The growth in government deposits, which comprise around 16% of total deposits as of December 2021, remained negative in December, declining 7.2% year-on-year, while private sector deposit growth remained subdued at –0.4%. However, the future looks promising with oil prices at well over $100 a barrel, so liquidity and deposit growth are expected to improve.

Q: Is consolidation in Kuwait’s banking sector likely, or have higher oil prices eased pressure on banks to merge?

A: We believe consolidation is necessary, especially among the smaller banks that are disadvantaged by higher cost structures, and a lower lending capability for larger and higher quality borrowers and projects. However, the ownership control remains the main constraint.

For instance, Saudi National Bank came into existence in Saudi Arabia following the merger of National Commercial Bank (NCB) and Samba. Saudi Arabia’s sovereign wealth fund, Public Investment Fund, was a major shareholder in both lenders, holding a 44% stake in NCB and 23% of Samba. Similarly, the government of Kuwait held 23.97% (and an additional 24.08% via Kuwait Investment Authority) in Kuwait Finance House (KFH) and 18.69% in Ahli United Bank (AUB).

KFH had plans to acquire AUB before the onset of the pandemic and, if successful, it would have created one of Kuwait’s biggest Islamic banks. However, the deal has been postponed because of the uncertainty surrounding the pandemic and to allow an updated feasibility study and time frame. There have been no subsequent developments. Fitch Ratings anticipates more mergers and acquisitions are likely to be seen in the Islamic banking sector in the Gulf region, as many Islamic banks have weak franchises lacking strong competitive advantages, particularly in pricing, cost of funding and growth opportunities.

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Read more about:  Middle East , Kuwait , Kuwait bounces back
John Everington is the Middle East and Africa editor. Prior to joining The Banker, John was the deputy business editor of The National in the UAE, and has also worked for Dealreporter, Arab News and The Telegraph. He has also covered the telecom sector in Africa and the Middle East, living and working in Qatar and the UK. John has a BA in Arabic and History and an MA in Middle Eastern Studies from the School of Oriental and African Studies (SOAS) in London.
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