Underpinned by rising commodity prices and, consequently, increased domestic spending, Kuwait’s banking sector performed well in the 18 months to mid-2018. The industry posted net profit growth of 8.9% and total asset growth of 5.9% to $251.9bn in 2017, according to professional services firm KPMG, even as local banks moved to adhere to a raft of new provisioning rules. With the price of crude more than doubling from $28 per barrel in January 2016 to $76 in September 2018, the state has expressed confidence in its ability to move forward with KD34bn ($112.5bn) in planned capital expenditure under the National Development Plan, which runs from 2015 to 2020. This will have positive knock-on effects for the banking sector, which has long been a beneficiary of state spending in the form of government deposits and financing opportunities.
While the sector’s performance will continue to be linked to the price of hydrocarbons in the coming years, it is widely expected that non-oil activity will account for a rising percentage of lending over the next decade. Forecasts by National Bank of Kuwait (NBK) put non-oil economic growth at 3.5-4% in 2018, up from 3.2% in 2016 and an estimated 3.3% in 2017. According to the IMF, this steady expansion is due to improved market confidence and the state’s ongoing drive to diversify away from hydrocarbons.
Banks, specifically, have reduced their overall exposure to the sluggish real estate market and volatile investment industry, and are working to expand their activities in the digital realm in line with goals under the long-term developmental blueprint, New Kuwait 2035.
Kuwait’s modern financial services industry got its start in 1941. That year a group of British investors obtained a 30-year concession from thenEmir Sheikh Ahmed Al Jaber Al Sabah to establish Bank of Kuwait and the Middle East (BKME), the nation’s first domestic lender. This was followed just over a decade later, in 1952, by the founding of NBK, which is the largest lender in the country today. Gulf Bank and Commercial Bank of Kuwait – both of which were among the top-five largest local players in 2017 – were created in 1960. That year also saw the establishment of the Kuwait Currency Board (KCB), which created the Kuwaiti dinar in 1961 as the new national currency.
In 1968 the government passed Law No. 32, introducing the nation’s first comprehensive financial regulatory framework and replacing the KCB with a new regulator, the CBK. Kuwait Finance House (KFH) was launched in 1977 as the first domestic Islamic financial institution. The sector continued to develop throughout the 1980s and early 1990s despite internal and external instability – the most notable source of which was the 1990-91 Gulf War. The conflict necessitated the complete shutdown of domestic lending institutions, and saw the physical destruction of bank buildings and financial documents, as well as asset theft.
New Found Stability
Following the rebuilding of the banking sector after the war, there was a period of rapid expansion. Beginning in the mid-1990s, most lenders reported exponential profit growth as a result of high oil prices, the introduction of a raft of new public development projects and a surge in private investment activity, particularly in the real estate sector. These trends, which mirrored similar growth trajectories in financial sectors across the Gulf region, continued through the mid-2000s. Over the decade from 1996 to 2006, Kuwait’s total banking assets more than doubled, rising from KD11.5bn ($38bn) to KD27bn ($89.3bn), according to the CBK, with most banks maintaining relatively responsible lending practices during this period.
The effect of this conservative approach was evident in the wake of the 2008-09 global financial crisis. When other institutions across the region had issued high amounts of bad debt, resulting in serious repercussions for some markets, Kuwait’s banks saw only a slight stall in growth and a rapid recovery afterward. Indeed, between 2006 and 2009 the nation’s total domestic banking assets grew from KD27bn ($89.3bn) to KD40.4bn ($133.6bn), with the help of steady performances from Islamic banks. Asset growth has continued since 2009, hitting KD64.48bn ($213.3bn) in July 2018.
The ease with which most local banks rode out the global economic downturn can also be attributed to the state’s legislative and regulatory efforts after the crisis. The worst hit domestic lender, Gulf Bank, declared on October 26, 2008 that it had suffered losses as a result of its trading in financial derivatives on behalf of its clients. External auditors found that the losses equated to KD375m ($1.2bn), and the government sought to quell investor fears of a crash by implementing Law No.30/2008, whereby the state guaranteed all deposits in Kuwait’s domestic banks.
While other banks were relatively insulated against the shock, a number of investment companies were caught holding bad credit, primarily in the form of property and KSE securities purchased with loans from the banking sector. As a result, a handful of domestic banks reported an increase in non-performing loans (NPLs) during the post-crisis period. In response to this situation, the CBK rolled out various policies in the years after 2008 aimed at facilitating the restructuring of bad debt with state support. To address system NPLs, the biggest challenge at the time, the CBK adopted a conservative provisioning approach, requiring banks to build precautionary provisions, and at a later stage adopted Basel III requirements, improving capitalisation with a focus on core capital. The Financial Stability Law was also introduced in March 2009, guaranteeing coverage of shortfalls in bank provisioning for loan losses and provided a blueprint for restructuring outstanding debt held by investment companies, with provisions for state-sponsored financing, if necessary.
Under the 2010 Capital Markets Law, meanwhile, officials completely restructured the country’s exchanges, creating a new regulatory agency – the Capital Markets Authority – and enacted more conservative rules for investment firms. The latter action was an effort to prevent high levels of exposure to risky securities and protect against future crises. The Financial Stability Law and the Capital Markets Law, plus heavy provisioning by local lenders, quickly stabilised the sector after the downturn, laying the groundwork for rapid recovery.
A more forward-looking approach to provisioning characterises the International Accounting Standards Board’s ninth International Financial Reporting Standards (IFRS 9), which came into effect at the start of 2018. Although the general consensus was that the conservative approach of Kuwait’s banks to loan-loss provisioning would allow for a smooth transition, some financial institutions were reported in mid-2018 as having had difficulty implementing the standards due to contraventions with sharia law. Nonetheless, the general provisions accumulated by domestic banks in recent years, comfortable liquidity buffers and high asset quality – with the NPL ratio at 1.9% and record coverage of around 230% – should ensure a smooth transition overall moving forward.
By the Numbers
Consistent asset growth has accompanies strong asset quality, and according to the CBK, domestic banks had total assets of KD64.48bn ($213.3bn) in July 2018, up from KD63.41bn ($209.8bn) a year earlier, KD60.44bn ($199.9bn) at end-2016 and KD58.61bn ($193.9bn) at end-2015. Within these totals, foreign assets remained largely stable, rising from KD12.55bn ($41.5bn) at end-2015 to KD12.89bn ($42.6bn) in July 2018. Overall, assets held by local banks grew by 5.1% per year on average in the 2012-17 period.
Key to this expansion has been growth in credit issued to the government, which rose from KD1.58bn ($5.2bn) at the end of 2015 to KD5.06bn ($16.7bn) at end-2017 and KD4.08bn ($13.5bn) in July 2018.
Credit issued to private sector businesses and residents, meanwhile, expanded at a slower pace between the end of 2015 and July 2018, rising from KD35.3bn ($116.8bn) to KD38.13bn ($126.1bn). “Due to their liquidity, the government borrows from banks to finance large-scale projects,” Elham V Mahfouz, CEO of Commercial Bank of Kuwait, told OBG. “However, there is a need to unlock further big projects to bolster the economy and foster new business.”
The deposits side of the ledger has expanded steadily as well. In July 2018 private sector deposits in Kuwaiti banks equalled KD36.34bn ($120.2bn), up from KD35.4bn ($117.1bn) at the end of 2017, KD34bn ($112.7bn) at the close of 2016 and KD33.71bn ($111.8bn) at end-2015. These figures represent consistent growth in domestic savings since the global financial crisis. Indeed, private sector deposits have risen every year since 2011, when they totalled KD26.73bn ($88.4bn). Government deposits have also grown steadily over the decade, from KD4.01bn ($13.3bn) in 2011 to KD6.75bn ($22.3bn) in July 2018.
Positive indicators across Kuwait’s banking sector point to rising confidence in the industry, both at home and in foreign markets. Indeed, in 2017 three banks – NBK, Al Ahli Bank of Kuwait and Warba Bank – successfully issued a total of $1.5bn in debt on the international market, with all three issues oversubscribed. Furthermore, in May 2017 global credit ratings agency Moody’s announced that it was maintaining its “Aa2” rating for Kuwait government debt, but revised the outlook from negative to stable. This decision was a reflection of international investors’ trust in the state’s ability to move forward with its development plans, not to mention the overall strength of the economy.
At the end of 2017 Kuwait was home to 11 domestic banks, five of which abide by sharia principles. In addition, 12 foreign banks operate branches in the country. Industry assets are heavily concentrated in a few of the largest institutions, with NBK and KFH together holding roughly 57% of all bank assets at the end of 2017. In the same year, Islamic institutions held just over 37% of total sector assets.
NBK, which has long been Kuwait’s largest lender, continues to lead across a range of indicators. The bank had total assets of KD26bn ($86bn) at the end of 2017, up 7.4% over the previous year, while net profit came in at KD322.4m ($1.1bn), a 9.2% increase on 2016. The bank also reported an NPL ratio of 1.42% in 2017, and an NPL coverage ratio of 287%, which is in line with coverage rates across the sector. “Credit growth in Kuwait remains solid, supported by positive economic activity as the government’s capital spending programme remains intact,” Nasser Al Sayer, group chairman of NBK, told local media in January 2018. “Kuwait’s fiscal position is better than its peers’ given our substantial buffers and strong sovereign ratings, creating room for acceleration in spending despite lower oil prices.”
In addition to operating on four continents and being present in many major global financial centres such as New York and Singapore, NBK owns a majority 58.4% stake in Boubyan Bank, a domestic sharia-compliant institution that has been experiencing strong growth (see Islamic Financial Services chapter).
The country’s second-largest lender is Islamic bank KFH, which posted net profit of KD184.2m ($609.4m) in 2017, up 11.5% over 2016. The bank attributed the jump in profit to an increase in operating income and a decline in general administrative expenses. Meanwhile, KFH’s total assets rose by 5.2% over the course of 2017, from KD16.5bn ($54.6bn) to KD17.36bn ($57.4bn). The institution’s NPL ratio was at 1.58% for the year, and its NPL coverage ratio equalled 330%.
KFH has invested heavily in digital connectivity and other technological solutions in recent years. This includes placing foreign currency ATMs at Kuwait International Airport, revamping its online presence and introducing an updated mobile banking application. Although KFH has been a major beneficiary of the state’s ongoing development push in terms of credit extension, in early 2018 it announced it would focus on financing small and medium-sized enterprises in the coming years. Another strategic decision was made in July 2018 to pursue a merger with Bahrain’a Ahli United Bank, which would result in the establishment of a new sharia-compliant lender worth some $92bn in total.
Burgan Bank, which was founded back in 1977, was the third-largest commercial lender at 2017, followed by Gulf Bank and the Commercial Bank of Kuwait.
New Kuwait 2035
As Kuwait looks to develop a prosperous and diversified economy under the seven pillars of the New Kuwait 2035 plan, developing partnerships between public and private actors across a range of sectors is seen as key. Indeed, Kuwait has embraced the public-private partnership (PPP) model in recent years, and updates to the legal framework governing them were implemented under the “New PPP Law” of 2014. The new regulations sought, among other targets, to ensure that lenders are able to finance such projects on reasonable terms and conditions.
A high level of PPP activity is generally seen as a fillip to domestic banks, with NBK highlighting in its 2017 annual report that “increased economic liberalisation means a greater requirement for banking services across industries and sectors, which will further support growth in credit and investment”.
As one of the pillars of New Kuwait 2035, opportunities for lending would appear particularly promising in the infrastructure sector, with several large-scale PPP projects in the pipeline. As the country’s largest lender, NBK has lead financing in a number of major infrastructure works, including the ongoing expansion of Kuwait International Airport, the Al Zour North Independent Water and Power Project, and the $20bn South Al Mutlaa City project – Kuwait’s largest housing development – among others.
Under New Kuwait 2035 and the National Development Plan, the state also aims to foster a digital transformation to drive economic growth. Looking to overhaul and automate its own systems in line with this national goal, the CBK bank appointed former chief digital officer at NBK, Tariq Al Usaimi, as head of its digital strategy in July 2018. Speaking to local press after his appointment, Al Usaimi said, “It is no longer feasible to do things manually at the central bank... systems need to be smart enough to cope with the digital age.”
The CBK has also recently moved to ensure improved oversight of digital payments in September 2018, mandating that all service providers must register on its e-payment system. The foundation for this move was laid in Law No. 20/2014, which put the central bank in charge of supervising and controlling electronic transactions. All service providers, including private businesses and public institutions, have 12 months to register, after which all electronic payment methods will be subject to the regulator’s scrutiny.
Regarding local commercial lenders, Gulf Bank has perhaps been one of the most pro-active in its pursuit of digital innovation, becoming in May 2016 the first bank in the Gulf region to launch a platform using biometrics for digital banking security. One year later, NBK opened a fully digital customer care centre in Bayan – part of an overarching strategy to move towards virtual branches and online service delivery. The country’s Islamic banks have also been recognised for their digital achievements, with Boubyan Bank named the world’s Best Islamic Digital Bank by Global Finance magazine in 2018.
Continued asset growth among many sector players is supported by robust, enforced regulation, on which the CBK has taken a particularly active stance since the 2008-09 global financial crisis. Heavy provisioning requirements enacted in the wake of the downturn have left the banking sector in a strong position today, with the IMF noting in a January 2018 report that the industry is “resilient to various stress tests, including credit, liquidity and market shocks”. Kuwaiti banks indeed have ample liquidity: in 2017 local institutions maintained average liquidity ratios of nearly 30%, some 12 percentage points above the minimum required rate of 18% set by the CBK. In conjunction with the IMF, the CBK is working to build on the sector’s strong position by implementing enhanced liquidity management measures, crisis management frameworks and an anti-corruption oversight system.
The anti-corruption drive has picked up speed in recent years, with officials establishing the Kuwait Anti-Corruption Authority in 2016. The entity has a broad remit to ensure transparency and improve integrity throughout the economy in an effort to improve the country’s performance on a series of global indices. “Last year we embarked on a strategy to enhance Kuwait’s position on international corruption indicators,” Hind Al Sabeeh, minister of economic affairs, social affairs and labour, told local media in March 2018. “We aim to finish this by the end of 2018 so that we can implement it as soon as possible. This should give investors the confidence they need [to do business here].”
Provided that oil prices retain the gains made during 2017 and the first half of 2018, local lenders expect to see a rise in credit demand from the public, corporate and retail segments alike. Furthermore, the sector’s strong liquidity position, as well as the economic liberalisation and infrastructure development being pursued under the auspices of Kuwait’s development plans, should give lenders another reason to be optimistic about asset growth in the years ahead.
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