Non-performing loans to be kept on tight leash

Kuwait’s relatively strong domestic operating environment expected to support asset quality

The asset quality of Kuwait’s banking sector is expected to progressively stabilise, mirroring the stabilisation of the countries’ real economy, according to analysts.

By the end of 2016, the nonperforming loans (NPL)-to-total loans ratio for the rated Kuwaiti banks stood at 2.2 per cent, compared with 2.4 per cent at year-end 2015.

NPL ratios are, however, estimated to have slightly deteriorated in the 2017.

“We expect stable NPLs at around 2 per cent of gross loans over the next 12-18 months, from 1.9 per cent as of the end of 2017,” said Thaddeus Best, an analyst at Moody’s.

“Asset quality will be supported by the relatively benign domestic operating environment as continued government spending will broadly support consumers’ ability to service debt and the cash flow of corporate borrowers.”

Analysts at Marmore believe Kuwaiti banks enjoy strong NPL coverage by provisions. These provisions are expected to be helpful as banks move to IFRS 9 in January 2018.

“Sectors sensitive to fiscal consolidation such as contracting, construction, real estate, retail and small-and-mediumsized enterprises [SMEs] are likely to face higher loan impairments,” said M.R. Raghu, head of Research at Marmore.

“|[The] loan quality of banks in Kuwait could be impacted by exposure to large single borrowers and some sectors’ exposure to unexpected shocks.”

However, the introduction of credit bureaus and the use of forward-looking credit management tools in line with new IFRS 9 accounting standards will further improve banks’ risk controls and strong provisioning coverage levels.

Credit concentration remains a key risk for many banks given their high exposure to prominent Kuwaiti family-owned groups, which dominates the private sector.

On a sectorial basis, real estate and its allied activities account for 53.4 per cent of overall credit outstanding. Stagnant sales and a slowdown in the real estate sector could lead to increase in nonperforming loans. Certain loans are continually refinanced at maturity while the repayment is primarily contingent on the sale of assets owned by these groups.

Rating agency Moody’s expects

NPL-total loans ratio at end of 2016, down from 2.4% witnessed in 2015

NPLs as a measure of gross loans expected in next 12-18 months

Significant general provisions, at 3.7 per cent of gross loans as of the end of 2017, will allow banks to migrate to IFRS 9 accounting standards without a negative impact on capital.” Thaddeus Best | Analyst at Moody’s

some new problem loan formation in Kuwaiti banks’ exposures abroad, especially in countries facing economic and political difficulties, such as in North Africa and Turkey.

Tricky exposures

Banks are also expected to remain exposed to high credit concentration and directly and indirectly (through collateral) to volatile equity and real estate markets. However, banks maintain comfortable liquidity buffers and a stable deposit base.

“Capital levels are solid, with the system’s Basel III Tier-1 capital ratio at 15.8 per cent as of December 2017. Significant general provisions, at 3.7 per cent of gross loans as of the end of 2017, will allow banks to migrate to IFRS 9 accounting standards without a negative impact on capital,” said Moody’s Best.

Kuwaiti banks will continue to have relatively comfortable liquidity buffers, mostly comprising cash, bank deposits and government securities (predominantly highly rated Kuwaiti government paper).

In contrast to some of their GCC peers, Kuwaiti banks continued to report growth in both private and public-sector deposits in recent years of low oil prices, albeit at a slower rate.

Government deposits also grew at a faster rate whenever private sector deposit growth slowed. Domestic deposits expanded by 3 per cent in 2017.