Kuwait’s positive macroeconomic outlook, higher oil prices, and rising interest rates are smoothening the recovery path for Kuwaiti banks, according to the latest report released by S&P Global Ratings.
Earnings in the banking sector are expected to fully recover in 2022, supported by higher margins since banks’ balance sheets are geared toward rising interest rates and lower credit
charges.
Based on disclosures from banks that report this sensitivity – for every 100 bps increase in rates, they see a 25 percent increase in their net income on average, assuming a parallel shift in the yield curve.
“The operating environment for banks in Kuwait will improve in 2022 thanks to higher oil prices and continued recovery from the pandemic. However, some constraints persist,” the S&P Global Ratings report states.
“The Kuwaiti government’s fiscal funding strategy remains uncertain, considering that the debt law has yet to be adopted. What’s more, the government’s key liquidity buffer, the General Reserve Fund (GRF), has diminished substantially.”
However, reports of late payments to public entities and suppliers emerged earlier this year, as was the case before Covid-related setbacks.
Across the Kuwaiti banking sector, nonperforming loans (NPLs) were low entering the pandemic in 2020.
Additionally, Kuwaiti banks’ high provisioning buffers allowed them to write off exposures with manageable adverse effects on earnings and asset quality, the report added.
“We now expect NPLs and cost of risk (CoR) to gradually normalise on the back of a more supportive economic environment. We also expect that higher interest rates will support banks’ profitability,” S&P Global ratings experts added.
“That said, structurally high exposure to real estate and construction – with almost 30 percent of banks’ lending – continues to be a key risk.”
Funding conditions remain favourable in Kuwait, underpinned by stable deposits from the retail sector and government-related entities (GREs).
It remains to be seen if the increase in interest rates will cause some migration from non-interest-bearing deposits to remunerated products.
The sector’s funding profile is supported by a strong local deposit base, with retail deposits estimated to contributed more than 40 percent of total deposits at end-2021.
Banks were in a net external asset position of 14 percent of domestic lending at the end of last year, which translates into a low vulnerability to investor sentiment or to the expected increase in cost of foreign funding, the report concluded.
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