MEED: How can Kuwaits banking sector counter headwinds and remain profitable?
Isam Jasem al-Sager: Unlike neighbouring economies, Kuwait has generally not suffered from a slowdown in economic activity and this is mainly because of the lack of infrastructure spending in the past.
The banking sector in Kuwait has recently seen improved profits, benefiting from the progress in economic activity. We have recently witnessed a pick-up in infrastructure spending by the government, which has improved private sector sentiment and created more activity within the banking system.
Credit growth in the banking system has picked up to an average of 6-8 per cent over the past couple of years, and we continue to see strong project tendering and award activity. This is supporting a strong pipeline of transactions and the outlook for credit growth is positive.
The expected growth in banks balance sheets will reflect positively on profitability, especially as most of the new credit is of higher quality. NBK also remains optimistic about the outlook for provisioning and asset quality as the banking sector has undergone an intensive clean-up exercise over the past years, and has booked significant provisions. The sector today is in a much better shape than a few years ago.
Most banks in Kuwait are well-positioned to benefit from the expected higher interest rate environment going forward. System liquidity has not seen significant pressure and benefits from asset growth and yield improvements will filter down to the bottom line.
? The Kuwait banking sector today is in a much better shape than a few years ago
? There is no trend for banking sector consolidation in Kuwait
? The execution of government projects has accelerated, creating opportunities for banks
Is there room for consolidation in Kuwaits banking sector?
In Kuwait and the GCC, consolidation remains opportunistic. The recent deals in some GCC countries were unique and are not viewed as part of a wider consolidation trend. More importantly, these transactions were not driven by any systemic concerns or regulatory pressures. We do not expect a consolidation trend in Kuwait as the banking sector is less crowded.
NBK continues to focus on markets where we already operate, paying special attention to the Middle East and North Africa and, specifically, the GCC and Egypt. In Kuwait, we continue to be in a favourable position due to being the only conventional bank in the country to have access to Islamic banking segments, through our 58.4 per cent ownership in Boubyan Bank.
How effective are Kuwaits spending controls, subsidy cuts and diversification plans?
Economic growth has gone relatively well in Kuwait compared to other GCC states. Non-oil growth is holding, or even improving slightly in 2017 and 2018.
Kuwait has undergone fiscal adjustments to the lower oil price environment, but the impact on the economy has been contained. The government responded by cutting spending over the past two years. Cuts were relatively limited and focused on areas with little to no impact on domestic activity. Overall government spending is expected to return to positive growth in 2017-18, to about 4-5 per cent.
Austerity in Kuwait has had a negative, though limited, impact on domestic activity, especially on the consumer. While employment remains robust, thanks to continued government hiring of Kuwaiti nationals, households have become more cautious. This is in part due to reductions in subsidies, although those have been gradual and relatively limited compared to other GCC countries. Nonetheless, consumer sector growth has slowed from double-digits to more moderate levels.
Capital spending plans have not been touched. Kuwait has been ramping up spending on projects since 2014, and this has positively impacted growth and bank lending, both of which are expected to accelerate in 2017 and 2018.
Diversification plans have also been supportive of growth in recent years. We expect this to continue. Good progress has been made in increasing the role of the private sector through public-private partnership projects. More needs to be done, but Kuwait is off to a good start.
Will asset quality concerns be a recurring theme this year and beyond?
Asset quality risks loom with the deteriorating health of corporate customers on the back of the slowdown in GCC economic activity, most of which is linked to government spending. With squeezed state revenues due to weaker oil prices, deposit growth has slowed, leading to tighter liquidity, higher cost of funds and pressure on profitability levels.
Things are different in Kuwait as we continue to see decent growth trends. The execution of government projects has accelerated, creating opportunities for banks. Asset quality deterioration is less likely as most of the growth is generated by fundamental economic activity.
Liquidity trends in Kuwait have remained relatively strong as banks are less reliant on government deposits. Both private and public sector deposits remain strong, despite some slight deceleration. The Central Bank of Kuwait, along with most GCC central banks, has adopted a conservative approach, pushing banks to build buffers since the financial crisis.