Moody’s affirms stable outlook for Kuwait banking sector on non-oil growth momentum

• Moody’s links the stable outlook for Kuwaiti banks directly to continued expansion in the non-oil economy, supported by heavy government investment in major infrastructure projects under Kuwait Vision 2035. This environment is expected to sustain business activity and lending opportunities.
• Banks are forecast to record credit growth of around six percent, mainly from corporate lending. At the same time, loan quality is expected to remain stable, with non-performing loans near 1.7 percent, while capital levels and provisions remain strong, ensuring high loss-absorption capacity.
• Although funding and liquidity positions are robust, profitability is expected to soften as lower interest rates squeeze margins. However, risks are cushioned by stable deposits, high-quality liquid assets, conservative regulation, and a very high likelihood of government support if needed.

Moody’s Investors Service has affirmed a stable outlook for Kuwait’s banking sector, citing expectations that the country’s non-oil economy will expand in 2026 at a pace similar to 2025. The assessment reflects continued government spending on strategic infrastructure initiatives designed to diversify the economy and sustain business activity beyond the oil sector.

The agency said Kuwaiti banks are positioned to benefit from credit growth of nearly six percent over the coming year, driven primarily by strong corporate demand for loans.

This momentum is linked to the government’s commitment to its national development strategy and ongoing investment in major projects, including Mubarak Al-Kabeer Port, Sabah Al-Ahmad City, and the new passenger terminal at Kuwait International Airport.

Moody’s expects domestic loan quality to remain resilient, supported by favorable operating conditions, while capital levels are projected to stay stable.

However, profitability is likely to face moderate pressure as net interest margins narrow in a lower interest rate environment.
The report noted that Kuwaiti banks continue to rely on steady deposit inflows as their principal funding source and maintain strong liquidity buffers.

Growth in non-oil gross domestic product is expected to remain firm, reinforcing banks’ ability to generate business and expand lending. Progress on infrastructure development under Kuwait Vision 2035, along with recent regulatory changes in the real estate sector, is anticipated to strengthen the operating environment for lenders.

Corporate lending is forecast to be the main driver of credit expansion over the next 12 to 18 months. Consumer lending could also gain additional momentum if the proposed mortgage finance law is enacted.

Moody’s further expects continued consolidation within the banking sector through mergers and acquisitions; a trend it believes could enhance long-term financial stability by improving efficiency and reducing competitive pressures. At the same time, regional geopolitical tensions, particularly those linked to Iran, remain a key external credit risk.

Non-performing loans are projected to stabilize at around 1.7 percent of total loans in 2026, reflecting stable domestic conditions. Although some risks stem from banks’ limited exposures in weaker overseas markets such as Türkiye and Egypt, Moody’s said these exposures remain contained.

Nonetheless, concentration of credit among large borrowers and exposure to cyclical sectors such as real estate and equities continue to pose structural risks. By September 2025, real estate and construction accounted for 22 percent of total lending.

Consumer loans represent about 39 percent of total portfolios, largely extended to Kuwaiti government employees. Moody’s noted that high job security and salary transfer arrangements provide a degree of protection, even as some new non-performing loans may emerge within certain retail segments.

Capital strength is expected to remain solid, with the ratio of tangible common equity to risk-weighted assets projected to hold between 13.5 and 14 percent. Loss-absorption capacity is further supported by high provisioning levels, with loan-loss reserves equivalent to 219 percent of non-performing loans as of September 2025. The Central Bank of Kuwait’s conservative approach to loan classification and provisioning underpins this resilience.

Over the next 18 months, banks are expected to preserve strong capital positions, aided by retained earnings. Profitability, however, is forecast to ease as asset yields decline more quickly than funding costs amid lower interest rates and continued competition for deposits. Sector-wide net income is projected to average around 1.2 percent of tangible assets, compared with roughly 1.4 percent during the first nine months of 2025.

Loan-loss charges are expected to remain manageable despite a slight uptick linked to weaker recoveries. Operational efficiency should stay strong, supported by relatively lean branch networks and sizeable asset bases.

On funding, Moody’s anticipates continued moderate reliance on wholesale markets, with customer deposits remaining the backbone of funding. As of September 2025, deposits accounted for roughly 69 percent of non-equity funding sources. While government-related deposits remain concentrated, they have demonstrated consistent stability over time.

The loan-to-deposit ratio, currently above 90 percent, may rise modestly as lending growth outpaces deposit expansion. Liquidity remains robust, supported by high-quality liquid assets equivalent to 16 percent of tangible assets. The position is further strengthened by the expansion of domestic high-quality liquid assets following the Public Debt Law, which enables issuance of sovereign bonds and sukuk eligible as top-tier liquid assets.

Moody’s assumes a very high likelihood of government support for banks if needed, underpinned by Kuwait’s sovereign credit rating of A1 with a stable outlook and the presence of a formal deposit guarantee scheme. This expectation of state backing continues to support the credit profiles and deposit ratings of Kuwaiti banks.