Kuwait | Country Report
PRIVATE-SECTOR REFORMS FAVOR BANKING SECTOR
There is an air of optimism in the banking community in Kuwait that this time things will be different. With the recently enacted five-year plan and after years of political wrangling, bankers detect a concerted effort to liberalize the economy. With GDP per capita of more than $45,000, according to the IMF, their confidence looks compelling. “We do sense the government’s determination for a speedier implementation of this new plan,” says Bashir Jaber, head of group corporate communications and investor relations at Burgan Bank.
Alexios Philippides, an analyst at Moody’s Investors Service, says the optimism bodes well for the sector, assuming the government can break free of the political inertia that has stalled project execution. “If there is greater private-sector participation by international companies, they will require domestic banking relationships, which will be generally positive for banks in Kuwait.” That scenario is also likely to boost credit growth, which Moody’s estimates could reach 10% over the next year.
It is the prospect for corporate credit growth that excites analysts, as the private sector accounts for a small share of all loans. They cite trade and construction as potential growth markets that were early beneficiaries of previously deadlocked infrastructure projects, but for the moment high public-sector wages will continue to drive demand for consumer loans. In the past, loans provided for the purchase of securities proved disastrous, but there has been a marked improvement in asset quality, with nonperforming loans at 3.5% of total loans in June 2014, down from 4.6% in June 2013, according to the Central Bank of Kuwait and the IMF. Additionally, Kuwaiti banks are very well capitalized, with an average capital adequacy level of more than 18%, says the Central Bank of Kuwait.
The well-documented rise of Islamic finance traditionally centered in Bahrain has recently seen growing competition from Dubai. Yet according to Qutayba Al-Bassam, senior manager, corporate communications, at Boubyan Bank, demand for shariah-compliant financial services is showing strong growth in Kuwait. He cites the increase in market share of Islamic banks, which reached 41.5% in 2013, up from 39% in 2012. Shariah-compliant financial services in the consumer sector are also performing well, with 45% of salaried Kuwaitis transferring their salaries to Islamic banks, up from 37% in 2009. That increase has been reflected in the rapid expansion of bank branches, which have grown at five times the rate of conventional banks, according to Al-Bassam. In 2014, Islamic banks constituted 41% of the Kuwaiti branch network.
Attention is also focused on the Kuwait Stock Exchange, one of the oldest in the Middle East, and whether, following neighboring Saudi Arabia’s decision to allow direct foreign investment on the Tadawul, Kuwait will open its market to institutional investors outside of the Gulf Cooperation Council. There has been no indication that will be the case, but banks in Kuwait would be well positioned to take advantage of such a development.
