Moody’s, the global credit rating agency, said that Kuwaiti banks enjoy sound capital and strong liquidity, which are two factors that lead to expecting a stable future outlook for banks, and expected Kuwait to record moderate growth in the non-oil economy.
The agency indicated that the total assets of Kuwaiti banks currently amount to $375.27 billion, led by Kuwait Finance House with $120.79 billion, followed by the National Bank of Kuwait with $118.73 billion, the Boubyan Bank with $25.75 billion, and Burgan Bank with $23.41 billion, followed by the Gulf Bank with $22.38 billion, Al Ahli Bank of Kuwait with $20.98 billion, Ahli United Bank with $15.39 billion, Commercial Bank of Kuwait with $14.08 billion, and finally Warba Bank with $13.72 billion.
In the context of its report on the Kuwaiti banking sector, the agency said: “Our expectations of a stable future outlook for the Kuwaiti banking sector reflect the continuation of expectations that the country’s non-oil economy will continue to expand during the years 2023 and 2024.”
The agency added that Kuwaiti banks will reap the benefits of bank credit growth estimated at about 3% this year, with the government’s continued commitment to the national development plan, and spending on infrastructure and large projects will boost the demand for loans.
The agency went on to say, the quality of local loans will remain sound, despite the possibility of pockets of risk in the small business sector with high interest and bank operations in weaker economies such as Turkey and Egypt, and wide exposure to real estate and stock markets which represents weaknesses, but ample provisions and hedging of loan losses and strong capital provide a protective shield.
Meanwhile, the agency said that the profitability of Kuwaiti banks will be subject to slight pressures, but they will remain intact, drawing support from high efficiency, while Kuwaiti banks are funded through steady flows of stable deposits and the strong liquidity they provide, and Moody’s considered that economic expansion, sound capital and strong liquidity One of the factors that directs its expectations with a stable future outlook.
The agency added it expects Kuwaiti real non-oil GDP to grow by 3% in 2023, and government spending will boost the non-oil economy, which is the area in which banks carry out most of their activities and businesses, and it will achieve growth of about 3% this year.
Moody’s also expects new project awards in Kuwait to be strong in 2023, as this will support the government’s commitment to its national development plan more than enough to offset the loans that have been settled and indicated that the economic expansion and the booming real estate market will maintain the stability of loan performance over the next 12 to 18 months, and the non-performing loan ratio in Kuwaiti banks was low, reaching 1.6% in 2022, down slightly from 1.7% in 2021.
The large concentrations of loans granted to individual borrowers and to some business sectors, especially real estate at 18% of total loans, would make banks vulnerable to the risk of a few defaults or a shock in the oil sector.
But consumer loans, which constitute about 35% of loan records, are covered with good protection because they are directed to a large extent to public sector employees who in turn enjoy a high level of job security, and the exposure of banks at the global level as a result of working in weaker operating environments, including Turkey. And Egypt, to create pockets of risk, while higher interest rates, which have followed the example of the US Federal Reserve, may also affect the most vulnerable small business sector.
Kuwaiti banks maintain large provisions to counter loan losses amounting to 270% of non-performing loans as of December 2022, in part due to the Central Bank’s strict policy in building these provisions that would provide effective buffers.
In terms of capital in the Kuwaiti banking sector, Moody’s said that it will remain healthy in light of the Central Bank of Kuwait’s conservative approach in applying Basel III standards related to capital, and this guarantees banks to maintain strong capital reserves. Our sector-wide tangible equity ratio in Tier 1 – which is our preferred measure of capital for reasons of global comparability – was approximately 12.4% of risk-weighted assets at the end of 2022 compared to 12.9% in 2021.
The agency expects that the capital of Kuwaiti banks will remain stable over the next 12 to 18 months, thanks to the moderate growth of loans and the capabilities of generating internal capital through the retention of profits.
The agency considers financing will remain a strong point, while liquidity continues to be abundant. Banks were mostly funded through stable deposits, which is a credit feature. Customer deposits accounted for about 73% of all bank liabilities as of December 2022. It is still possible to rely on financing from the market, which — although it suffers from great sensitivity towards confidence with slight growth — is under control and can be controlled. But liquid assets make up more than 30% of tangible banking assets.
It will still be sufficient to protect banks from the risks associated with their heavy reliance on government-linked deposits. Kuwaiti banks still lack sufficient government bond issuances in light of the absence of a law that allows the government to borrow and issue bonds, as it has not yet been approved by the National Assembly.
This means that most of the local currency liquidity is invested in short-term instruments, including deposits with the Central Bank of Kuwait and Sharia-compliant liquidity facilities with Islamic banks.
Moody’s said that it assumes a very high probability of government support in the event of a bank failure, as the government is still ready to support banks in financial distress and its ability to do so will remain strong, as evidenced by its issuer rating at A1 with an outlook stable.
The official government deposit guarantee also reinforces our assumption of obtaining government support if the need arises, noting that most of the long-term deposits in Kuwaiti banks have ratings that are four degrees higher than the basic credit ratings thanks to government support.