In the years since the 2008 economic crisis local lenders in Kuwait have expended much effort on restructuring loan portfolios, aided by a central bank keen on returning the domestic market to a position where it might lend productively and thereby stimulate the wider economy. High rates of provisioning and anaemic credit growth suggest this process is not yet complete, but progress has been made in creating a lending environment adequate to an expanding economy’s needs.
LENDING HITS A WALL: The expansion, and subsequent contraction, of aggregate lending by Kuwait’s locally incorporated banks in recent years mirrors that seen in banking sectors the world over. Data from independent ratings agency Capital Standards shows the extension of credit to the local market rose rapidly in the years prior to the credit crunch, from KD16.05bn ($57.9bn) in 2006 to KD22.94bn ($82.7bn) in 2007 (a gain of 42.9%), and then to KD27.34bn ($98.6bn) in 2008 (a rise of 19.2%). However, as the global economy tipped into the IMF’s definition of a global recession during 2008 and 2009, lending in Kuwait slowed rapidly as international credit lines dried up and banks examined their loan portfolios with an ever-more critical eye. While risk managers picked over the detail, the headline figures issued by the central bank revealed a vulnerability to bad debt that has acted as a dampener on profitability. The non-performing loan (NPL) to gross loan ratio stood at a relatively modest 2.9% in 2006, rising to 3.1% in 2007. As the credit squeeze tightened in 2008 the ratio rose to 6.1%, before reaching 10.3%, or KD2.99bn ($10.8bn) in 2009 – an unsustainable level that prompted the ongoing restructuring of loan portfolios and is a major factor in the negligible growth of sector credit since. Gross lending, which had expanded by 19.2% between 2007 and 2008, grew by only 7% from 2008 to 2009 and a meagre 0.6% from 2009 to 2010.
A NEW ERA OF PRUDENCE: The precipitous fall in credit expansion is attributable to a number of factors, some of them beyond the banks’ control. Slow growth in the non-oil sector, which has not escaped the effects of a cooling global economy, has reduced the appetite for credit in the local market. “Lending opportunities are limited. GDP growth is coming from the oil sector, not the private sector, where there is little demand no matter how low interest rates go,” Sadeq Abdul, the manager of Kuwait Islamic Bank’s research and regulatory division, told OBG. However, while demand for credit has lessened, Kuwait’s banks have also become more particular about who they offer it to. In the years of rapid credit expansion a number of local banks boosted their loan books by directing financing into Kuwait’s booming real estate sector, so that around 33% of sector exposure was to real estate developments in 2010.
A further 11% of aggregate credit went to the nation’s 100 or so investment companies, which had in turn ploughed it into a warming stock market and become accustomed to the generous returns to be found there.
The subsequent cooling of the real estate sector played a significant part in the weakening of local banks’ loan books, but it was the contraction in the Kuwait Stock Exchange (KSE) that proved the bigger challenge, as investment companies saw the value of their assets fall away and were forced into default.
While the government was quick to address problems with the Financial Stability Law, the business model that generated so much income for both investment companies and those that lent to them was no longer viable, and the tightening of lending criteria employed by Kuwait’s banks, largely in response to the plight of investment companies, has further contributed to the current stagnation of credit in the marketplace.
CENTRAL BANK RESPONSE: The Central Bank of Kuwait (CBK) has been quick to respond to the slowdown in lending, starting remedial measures as far back as October 2008 with a phased reduction of the discount rate, which saw it fall from 5.75% to 2.5% by February 2010.
The CBK also sought to stimulate spending by giving banks more room to manoeuvre, reducing the minimum liquidity ratio (or reserve requirement) of banks from 20% to 18%, and raising the maximum loan-to-deposit requirement from 80% to 85%. The Financial Stability Law introduced in 2009, meanwhile, contains a provision aimed at encouraging banks to extend credit to productive economic sectors, by which the state will secure 50% of bank loans taken out by companies or individuals with financial positions that satisfy the CBK’s instructions on credit and financial rationalisation. “We have seen that it is important to stimulate banks to continue bankrolling local productive economic sectors in a bid to find a way out of the suspension of under-construction projects that were launched ahead of the global financial crisis,” Sheikh Salem Abdulaziz Al Sabah, the then governor of the CBK, told the press.
FUTURE CREDIT GROWTH: While lending remains flat in 2011, the efforts of local lenders and the CBK have prepared the ground for the anticipated return to growth. After a period of restructuring and debt rescheduling with distressed corporates and investment companies, including a number of debt write-offs, the quality of the aggregate loan portfolio has been significantly enhanced. This is reflected in a reduction in NPLs, with the sector total dropping in 2010 to KD2.5bn ($9bn) from the KD3bn ($10.8bn) posted in 2009. Although still relatively high by historical standards, the downward trend suggests that local banks will be able to reduce provisions in 2012 and recover some portion of provisions booked since 2008.
The slow recovery of the real estate sector and the muted performance of the KSE have encouraged local banks to look elsewhere for lending opportunities, and personal lending, in particular, is of renewed interest.
The quality of consumer loan portfolios remained relatively unaffected during the financial crisis thanks to the secure employment enjoyed by most Kuwaitis and systemic stabilisers, such as the linking of credit card accounts to direct salary payments. However, while high margins and low delinquencies associated with consumer lending in Kuwait make it an attractive segment for banks, the return to commercial lending growth in the medium to long term remains of greater interest to them. The IMF’s prediction of 5.3% growth in real GDP for 2011 (following the 2% growth of 2010), increased consumer demand and strong oil prices have therefore come as good news to Kuwait’s banking sector. Central to the forecast GDP growth is the $30.8bn five-year development plan announced by the government in 2010, the implementation of which can hardly come quickly enough for the CBK.
“Without urgent and rapid capital spending on various state projects, there will not be good growth,” Al Sabah told CNBC Arabia Television in July 2011. The government, for its part, insists the spending programme will remain on track, and while its implementation continues, so does the onerous task of working through the soured loans to troubled investment companies. When both processes are finally resolved, the prospects of renewed lending growth in the Kuwaiti banking sector promise to be significantly enhanced.
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