Kuwait banking sector poised for growth and stability in 2025
Despite challenges such as tax reforms and regional risks, banks are set for growth, supported by strong risk management and a 3%-3.5% growth in the non-oil economy driving demand for financing.
• Banks benefit from cautious lending, large reserves covering non-performing loans, and increased government spending on development projects, creating financing opportunities.
The banking sector remains a pillar of economic stability, strengthened by a solid operating environment, strict regulations, and ongoing government support. Entering 2025, banks maintain a stable outlook, driven by non-oil economic growth and rising credit demand, fueled by continued government spending on major development projects, Al Anba newspaper reported.
While banks maintain strong capital ratios and high asset quality, they also benefit from ample liquidity and a sustainable funding strategy based on customer deposits, which helps mitigate risks associated with external borrowing. Despite challenges such as tax reforms and regional risks, banks remain well-positioned for growth and profitability, supported by prudent risk management and strong confidence in the banking system.
In recent years, banks have bolstered their financial solvency by adhering to Basel III requirements and maintaining strong capital levels, enabling them to absorb potential economic shocks.
The quality of bank loans in Kuwait remained among the best in the region, driven by prudent lending policies and substantial reserves that cover a high percentage of non-performing loans, further enhancing financial stability and resilience against future challenges.
Despite the sector’s positive outlook, banks face challenges that could impact profitability. These include tax amendments imposing a minimum tax on banks with international operations, potentially leading to a slight decline in net income.
Additionally, some banks have exposure to foreign markets such as Turkey and Egypt, according to a recent Moody’s report, making them vulnerable to market volatility. While interest rate fluctuations may affect banking profit margins, this impact could be offset by declining returns and lower funding costs.
How can banks sustain their resilience? What lies ahead for this vital sector amid energy market volatility and stricter tax regulations? Here’s a closer look:
1. Stable banking sector and credit growth
The banking sector maintains a stable outlook for 2025, with the non-oil economy expected to grow at a rate of 3%-3.5%. This growth will strengthen the business environment and drive demand for bank financing.
According to a Moody’s report, credit is projected to expand by 5%-6% during the year, fueled by government spending on major development projects, including the ongoing phases of Mubarak Al-Kabeer Port, new residential cities such as Al-Mutlaa and Sabah Al-Ahmad, and Kuwait International Airport’s new Terminal 2. These projects create significant opportunities for banks through financing contracts, real estate investments, and credit facilities for businesses and individuals.
This is reflected in banks’ financing to the business sector in 2024, which accounted for approximately 60.9% of total credit facilities for residents—an increase of KD 1.18 billion (4.1%)—reaching KD 30.1 billion by the end of December 2024, compared to KD 28.92 billion at the end of December 2023.
2. Capital strength and loan quality
Banks continue to uphold strong financial soundness indicators in terms of capital adequacy and liquidity standards through the following:
3. Liquidity and sustainable financing
A. Strong liquidity: The sector is characterized by high liquidity, with liquid assets accounting for approximately 30% of total tangible assets, highlighting its ability to easily meet financing obligations.
B. Reliance on customer deposits as a primary funding source: Banks depend heavily on customer deposits, which constitute 73% of non-equity financing sources, reducing the need for external borrowing and enhancing financial stability.
C. Stable loan-to-deposit ratio: Despite the increase in loan volume, the loan-to-deposit ratio (LTD) remains stable at around 90%, ensuring a healthy balance between credit growth and deposit availability.
4. Challenges banks face in 2025
Despite the positive outlook, banks face several challenges; most notably:
• New tax amendments: A 15% minimum tax will be imposed on banks with international operations, potentially leading to a slight decline in profits. Net income is expected to decrease to 1.2%-1.3% of tangible assets, compared to 1.5% in 2024.
• Risks associated with foreign markets: Some banks are impacted by economic conditions in countries such as Turkey and Egypt, though these risks remain limited due to the prudent policies banks adopt in managing foreign assets.
• Changes in interest rates: Lower interest rates may reduce returns on banking assets, but they could also decrease the cost of financing, potentially offsetting the impact on profitability.
5. Strong government support and continued confidence in the banking system
The banking sector benefits from strong government support, particularly during times of crisis. In addition, a formal deposit guarantee enhances customer confidence in the system.
Banks’ credit ratings also improve due to this support, with most banks receiving a four-notch upgrade as a result. Kuwait’s A1 credit rating, with a stable outlook, reflects the strength of the national economy and the government’s ability to support the banking sector during challenging times.
