Kuwait’s lenders are banking on broader expansion

Banks will be looking to end 2013 on a high note, after most of Kuwait’s lenders recorded encouraging results for the first three quarters of the year, with profits and lending activity on the rise, and prospects appearing sound for the final quarter and on into 2014.

With a dozen local banks operating in the market, divided almost equally between Islamic and commercial lenders, along with one specialised industrial bank, the sector is not crowded, even when the 10 foreign commercial banks are taken into account. While there is competition in the market, the expanding asset holdings, profits and loan activity of the domestic banks suggest that the economy has the strength to sustain the level of operation, with little pressure for a round of mergers or acquisitions.

Positive results so far for 2013

Third quarter earnings reports showed positive results across the board. The largest lender, the National Bank of Kuwait (NBK), posted net profits of $702m for the first three quarters of the year, representing a 34.7% increase while assets rose by 15.5% to $67bn. Loan activity also jumped, rising by 9.3% year-on-year (y-o-y), with deposits up by 16%.

Burgan Bank’s operating profit of $373m represented a 21% increase over the same nine-month term in 2012, with loan growth up by 17% and deposits rising by 20%, according to a statement issued in mid-November. Others that reported positive results included Gulf Bank, Boubyan Bank and Kuwait Finance House, which saw profits up by 7%, 22% and 17%, respectively.

Another feature in the banks’ financial statement was high levels of provisions set aside to cover non-performing loans (NPLs) and capital adequacy ratios, with some reporting coverage well in excess of 150% of inactive credits, while many noted a drop in NPLs.

Good growth outlook

The IMF has estimated that the non-oil component of the Kuwaiti economy will expand by 4.5% in 2014, and on November 9 IMF chief Christine Lagarde said the country had built up significant economic buffers to shield itself from exogenous shocks, such as a fall in oil prices. Meanwhile, the degree of expansion for the non-oil sector and the economic stability forecast by the IMF should see a steady rate of growth in banking activity in the coming year.

One of the key factors in the banks’ rising loan activity is consumer demand. Some $502m in personal loans were written in September, as household credit increased by 18% y-o-y.

This growth in demand has been fed to some degree by a rise in employment levels and strong consumer confidence, with a recent MasterCard survey finding Kuwaitis the most confident in terms of economic outlook in the Middle East and Africa region. At 96.8 out of a maximum 100 points, consumer confidence in Kuwait points to positive sentiment when it comes to both borrowing and spending.

Indeed, such is the appetite for loans, especially for real estate, that the Central Bank of Kuwait in mid-November issued a directive to banks to tighten up lending criteria. Among the requirements are that no loan for a real estate transaction can be given until a full report on the potential borrower’s financial status is prepared. Banks must also ensure that a loan for a real estate transaction is used for that purpose, rather than the funds being directed elsewhere.

It was not just the household segment of the market that saw strong loan growth; there were also solid business lending gains in September, with the non-financial business sector posting credit expansion of $697m for the month, the highest increase in more than a year, according to a report released by NBK in early November. This took the rate of lending growth in the sector to 4.4% y-o-y.

With Kuwait’s banks stocked with cash and well-provisioned against any external shocks, they should be well placed to extend profits through 2014 as the economy appears set to continue its solid rate of expansion.

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