Despite slumping oil prices, deficit budgets and Kuwait’s continued reliance on oil revenue, the country’s commercial banks achieved double-digit growth figures in 2014. Doubts about the wider economy notwithstanding, the banking sector’s growth momentum is likely to continue into this year.
According to the latest report from the Central Bank of Kuwait (CBK), the total assets of banks in Kuwait rose 12.2 percent year-on-year (y-o-y) to KD66.4 billion (US$220 billion) in 2014, the highest growth in last seven years. The CBK report pointed out that a major driver of growth was international activity, which accounted for more than a fifth of business and helped to reduce reliance on local revenue sources and to strengthen overall industry stability.
Governor of the Central Bank, Mohammad Al Hashel, said that asset quality within the banking system had visibly improved over the last few years, with the gross non-performing loan ratio dropping to a historic low of 2.9 percent in December 2014. The value of credit facilities, which rose 6.4 percent to KD30.8 billion ($102 billion) in 2014, added to the robust growth witnessed last year.
However, the CBK report notes that all was not smooth sailing and the banking industry faces strong headwinds from Kuwait’s weakening broader economy. The country’s continued reliance on oil income to fuel its economy has been exacerbated by a sharp decline in oil prices since mid-2014. Low oil prices have also had a dampening effect on the forward momentum of Kuwait’s five-year development plan that finally won parliament approval in February.
Meanwhile other challenges in the sector include a lack of placement options for the large amounts of liquidity currently held by most banks, and the unavailability of timely statistics on the market as a whole.
Nevertheless, the growth momentum displayed by the banking sector in 2014 has continued so far this year. The National Bank of Kuwait, the oldest and largest bank in Kuwait, posted profits of KD163.4 million ($541.6m) in the first half of this year — a 12.8 percent increase y-o-y — largely on the back of improvements in the operating environment and from tenders for large infrastructure projects.
The second largest player, Kuwait Finance House, reported a 14.1 percent climb in net profits to KD62.3 million ($206.5m) during the same period.
With Kuwait planning to develop new rail links and upgrade its roads, seaports and airports, construction is set to surge in the country over the coming years. Planned developments are worth an estimated $123.6 billion, outpacing Qatar ($113.8 billion), Oman ($29.6 billion) and Bahrain ($25 billion). In an analysis of the 100-largest construction contracts in the GCC in 2014, Kuwait came in third after the UAE and Saudi Arabia, based on the combined value of projects in the pipeline.
Kuwait’s Central Tenders Committee said in April that it had awarded an estimated $5 billion of new tenders during the first three months of the year, most of which, it said, were for energy projects.
In its findings, ratings agency Fitch said the knock-on benefits of Kuwait’s infrastructure surge are likely to extend to the financial services sector. Corporate lending is set to expand, offering high interest revenues and lower loan impairment charges, improving asset quality and providing a high reserve coverage ratio. In addition, growth will be bolstered by ongoing diversification strategies and a greater emphasis on retail lending and small and medium-sized enterprises (SMEs).