Standard & Poor’s (S&P) expects the profitability of Kuwaiti banks to rise during the next year in light of their full recovery in 2022, supported by high profit margins, noting that the banks’ balance sheets are heading towards raising interest rates and reducing credit fees.
S&P pointed out that developments in the real estate market reduce the quality of Kuwaiti banks’ assets, noting that the total exposure of banks to real estate and the construction sector accounted for about 30% of total loans at the end of 2021, while the commercial real estate sector (mainly offices) remains under demand pressures on office space, as a result of the shift to selling ‘online’ due to the ‘Corona’ pandemic and excess supply, and the agency believes that this sector will become the most likely source for generating non-performing loans in banks, reports a local Arabic daily.
In its report on international banks for the second half of 2022, the agency suggested a gradual decline in non-performing loans in Kuwaiti banks, and that they would witness a slight contraction during the next 12 to 24 months, and that the cost of risks would remain at about 100 basis points, given that some provisions in the sector are technical according to the rules of the Central Bank of Kuwait.
The sources stated this cost is lower than the 1.4 percent rate in 2020 and close to the rate of 0.9 percent in 2021 (calculated on the basis that banks control 60 percent of the local market share), stressing that the banks’ high allocation buffers will enable them to maintain a stable rate generally for the cost of risk, by writing off its non-performing loans when new non-performing loans arise, explaining that despite this, the investment real estate sector, primarily renting apartments to expatriates, is experiencing a slow recovery, expecting this sector to continue its recovery in the next 12-24 months, driven by better future economic prospects, and the return of expatriates to some extent.
The agency stated that financing in the banking sector derives support from a strong local depositor base, as it estimates that individual deposits contributed more than 40 percent of the total deposits by the end of 2021, and the net foreign assets of banks amounted to 14 percent of domestic lending at the end of last year, indicating that this translates into weak exposure to investors’ sentiments and the expected increase in the cost of foreign financing.
As for the government’s willingness and ability to provide financial support to banks, the agency clarified that despite the rise in oil prices, which will lead to strengthening the public finances and balance of payments in Kuwait during the period from 2022 to 2023, the government’s long-term financing strategy is still uncertain, as it has diminished. The main liquidity reserve represented by the General Reserve Fund and the Public Debt Law has not been adopted yet.
However, despite the prolonged confrontation between the executive and legislative branches and late payments to suppliers, the agency assumes that the government will overcome institutional constraints and have a mechanism to access the future generations fund if other options are not available, noting that it should support prices Currently high oil The assets of the General Reserve Fund that were depleted in the previous period.
S&P stressed that growth should recover in 2022, supported by high oil prices and production volumes, expecting Kuwait to achieve a large budget surplus this year, after a deficit of 15 percent of GDP annually over the past five years. However, S&P, given the moderation in oil prices, expects the budget to return to deficit during fiscal year 2024-2025.
