The Kuwait Ports Authority recently renewed its deposit in one of the banks, worth 80 million dinars, for a period of one year after the banks increased the pace of their competition for deposits in dinars, which recently helped jump interest rates to nearly double the cost recorded on the same funds last time, indicating that the pricing of funds rose at unprecedented rates.
According to responsible sources, it was noticed that there was a significant increase in the interest rate paid on it, reaching about 2.9 percent, noting that the previous rate was close to 1.7 percent, reports a local Arabic daily.
Perhaps what increased the importance of the new developments regarding banking competition for deposits in dinars was that it came this time from banks that were known to be conservative in pricing during the last period, in addition to the banking race over the KPA deposit, which witnessed great competition in which more than one bank offered comparable rates to record new levels of interest, unprecedented before the Covid-19 pandemic.
The sources pointed out that the KPA offered its deposit for renewal in an auction, in which all Kuwaiti banks participated, by submitting bids in closed envelopes, and the second highest price came with an interest close to that paid by the winning bank, which is by the way a traditional bank, but the irony is that other banks offered in the bidding low prices was 1.5 percent.
The sources explained this discrepancy by the fact that the banks that offered a low price during bidding was a proof of attendance in front of the depository government agencies only, but they knew in advance that they would not win this deposit, which prompted them to offer those prices.
Each bank offered the price that suits its needs of these funds, and not according to the deposit prices circulating in the market in the recent period, taking into account that the talk about the possibility of the US Federal Reserve raising interest more than once this year, fuels the burning banking competition in this regard.
It is likely that the Fed will raise the interest rate 6 times in 2022 by 25 points each (compared to 3 hikes 3 months ago), its beginning came weeks ago by a quarter point, which is the same increase that was decided locally at the same time, noting that there are 3 other hikes on the least in 2023.
It is also mentioned that, according to the recent decision of the Board of Directors of the Central Bank of Kuwait, the discount rate is 1.75 percent, while Hermes expected in a recent report that high federal reserve rates would lead to equal increases in the interest rate in the UAE and Saudi Arabia, while Kuwait may not follow suit.
It followed suit (as was the case in the last tightening cycle 2018) due to the high degree of flexibility in its monetary policy given that the dinar is not 100 percent pegged to the dollar.
Of course, the significant rise in interest rates for deposits recently recorded compared to the same period last year will achieve better returns for government agencies on their money, and will improve their revenues, but from the banking point of view it is clear that there is more than one consideration behind the growing competition of banks to attract deposits in dinars, while it is likely that the bank will maintain this competition in the pricing of government deposits which will be inflamed during the coming period.
Perhaps one of the most important reasons that raise the appetite of banks for government deposits in dinars, other than the odds of an increase in interest more than once this year, is the presence of an unprecedented need for some banks for government funds, which are usually used in arranging the Net Fixed Funding Ratios (NSFR) which are related to deposits older than a year, as stable government deposits in dinar contribute to alleviating the pressures of arranging the maturity ladder, which may push banks to issue sukuk or increase their capital in order to adjust their positions.
Of course, this is a natural result of the repercussions of the Public Institution for Social Security withdrawing the bulk of its deposits in local banks, and redirecting them in suitable investment opportunities, while government deposits recorded a decline last February by about 307 million dinars, or 4.11 percent on an annual basis, and that compared to its level of 7.477 billion dinars in February 2021, which prompted some banks to move towards compensating the void that must be filled from other sources, the availability of long-term liquidity to adjust the CBK ratios in calculating long-term funds.
The sources pointed out that some banks face challenges in meeting the liquidity ratios required by the Central Bank in the long term, taking into account that this does not mean, from the banking point of view, that these banks face a shortage of surplus funds, as it is known that all local banks are characterized by high liquidity surpluses, which allows it to expand its lending business, without relying on the financing market, which is more expensive.
However, the increasing banking demand for government deposits gives additional indications of the increasing positive expectations regarding the possibility of investment expansion in the local market during the coming period, which is supposed to be matched by a banker’s special preparations for credit expansion, and then the need for more funds regulating the maturity ladder, which will expose interest rates to deposits for further increases to the limits that would raise the cost of money for banks.
It is expected that Kuwaiti banks will achieve positive indicators in the net interest margin starting from the second quarter of 2022, as raising the interest rate will increase the returns on corporate lending, explaining that in terms of financing, most banks will benefit from deposits of current and savings accounts, which are not sensitive to some extent large (demand deposits) or slightly affected (savings accounts) by raising interest rates, which leads to the growth of the net interest margin.
According to the monthly statistics of the Central Bank of Kuwait, deposits continued to rise to 45.464 billion dinars at the end of last February, an increase of 174 million compared to January (+0.38 percent) and nearly 903 million since the beginning of the year (+2.03 percent) dinars, by 2.74 percent, compared to 44.251 billion in February of last year.
The total private sector deposits increased by about 361 million dinars on a monthly basis (+0.95%) compared to their level in January to reach 38.294 billion at the end of last February, while their increase amounted to 1.105 billion (+2.97%) during the first two months of 2022, while on an annual basis. It recorded an increase of 1.52 billion dinars (+4.13%) compared to its level in February of last year, which amounted to 36.774 billion dinars.
And the private sector’s deposits in dinars achieved a growth of about 246 million dinars, or 0.69 percent on a monthly basis, to reach 35.726 billion in February, and they increased by 760 million (+2.17%) since the beginning of the year, while they witnessed an increase of about 1.017 billion dinars (+2.93%). ) compared to its level in February 2021 when it amounted to 34.709 billion dinars.
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