Marmore: Credit Growth to rebound in 2018


Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre “Markaz”, recently released a report titled ‘Kuwait Banking Sector 2018- 7 Factors to Watch’.

Kuwait banks are at an inflection point. After years of underperformance relative to GCC peers, some green shoots provide positive guidance. Liquidity is abundant, and asset quality improvement is noticeable.

The increase in Fed rates will increase the cost of funding through increased rates of interest paid on deposits, however the good share of unremunerated deposits should provide good cushion here. Loan book growth has been tepid in the past (2.8%) and is expected to touch 4% in 2018-19 on the back of non-oil GDP growth and infrastructure investments. However, this loan growth will be enjoyed more by larger banks as they will be the only game in the town for larger borrowers and government projects. Another way of looking at this is defacto, they will capture the low risk projects and therefore can dictate prices. However, the medium and smaller banks will play out on the technology side taking advantage of tech savvy youth population. Banks will be limited in terms of risk funding due to pricing band mandated by CBK for short term and long-term. 

Another concern is the exposure of Kuwait banks to real estate sector, both direct and indirect (personal loans). While the combined share of lending to real estate sector and personal installment was about 33% back in 2008, it now stands at 53%.

There will be a rise in the cost of risk of the bank in 2018 because of the adoption of IFRS 9 and the higher amount of restructured and past due but not impaired loans present in their balance sheets. However, the general provisions that Kuwait banks have accumulated over the years will help a smooth transition to the new accounting standard. However, the general provisions that Kuwaiti banks have accumulated over the years will help smoothen transition to the new accounting standards.

The slowdown in economic activity in the past three years resulted in a slight increase in non-performing loans (NPLs) in 2017. However going forward we expect NPL ratios to stabilize in 2018 and improve in subsequent years.

The U.S Federal Reserve in December 2017 raised the interest rates to 1.50 per cent, a third rise in 2017, reflecting the progress in the world's largest economy that continued to add employment at a solid pace. Kuwait Central Bank is influenced by U.S Fed interest rate moves.  However, it does not always mimic the interest rate hike unlike other GCC countries as it pegs its currency to a basket of currencies (other GCC countries peg against dollar). Since 2016, US Fed has increased rates six times while Kuwait followed suit only in three of those.

Kuwait appears overbanked with a small population size and could benefit from consolidation as many banks lack sufficient scale. There are 12 foreign banks present in Kuwait in addition to 10 banks that have their headquarters in Kuwait. The environment for consolidation is stronger now than a decade ago.

Conventional banking’s value chain essentially involves functions such as taking savings, providing loans and facilitating payments. In this value chain, at the most risk of disruption is the payments business model since it is the least capital intensive and most tech-intensive. While block chain and cryptocurrencies were the main competitors of brick-and-mortar banking, the local banks would cope with the FinTech competition either through collaboration or via cost-reduction measures.

The 2017 has seen an improvement in the overall profitability of the Kuwaiti banks due to increasing amounts of earnings-generating assets and slightly higher interest margins. We expect the trend to continue.

About Marmore

Established in 2010, Marmore is a research subsidiary of Markaz, an Investment Bank and Asset Management Company with more than 40 years of experience. Marmore caters to the growing research and information needs of organizations in the MENA region.

For further information, please contact:
Alrazi Y. Albudaiwi
Media & Communications Department
Kuwait Financial Centre K.P.S.C. "Markaz"
Tel: +965 2224 8000 ext 1800
Fax: +965 2246 7264
Email: [email protected]