Kuwaiti banks are set to see their profitability recover, according to a new report from US rating agency Moody’s Investors Service.

A decline in problem loans coupled with increased cash flows of corporate borrowers is forecast to improve banks’ asset quality, which, in turn, will fuel profit growth.

Moody’s anticipates that non-performing loans (NPLs) account for about 3 per cent of gross loans for the year 2014-15. This compares with 4.6 per cent at the end of 2013. NPL volumes reached their peak at 10.2 per cent in 2009.

The Kuwait banking sector suffered one of the sharpest rises in problem loan volumes within the Gulf at the height of the crisis. Since then, about KD2bn ($7bn), equivalent of almost 70 per cent of total value of the sector’s peak reported problem loans, have been written off since 2009, according to estimates by Moody’s.

The rating agency does warn that banks are still vulnerable to high credit concentrations and restructured loans that remained undisclosed by the sector.

The wider macroeconomic environment in Kuwait is also supporting the health of the banking sector, with non-oil GDP growth set to rise to 4.4 per cent this year, compared with 3 per cent in 2013. This is the highest rate since 2007 and is driven by increased domestic consumption and higher capital spending by the government. Overall GDP is forecast to grow by 2.5 per cent.

Government spending is rising as the delayed National Development plan, first launched in 2010, starts to slowly be implemented. This suggests Kuwait is beginning to catch up with its Gulf neighbours, in terms of diversifying its economy and generating non-oil GDP growth.

Risks to the stability of the banking sector relate to any new schisms between the government and parliament which could stall capital expenditure and delay much-needed infrastructure development.

Any sustained decline in oil prices would also weaken both consumer and business confidence levels.

These risks are tempered by the country’s large fiscal surplus, predicted to be 28 per cent of GDP for 2014 and its low breakeven oil price of about $52 per barrel.

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