In conversation with Salah Y al-Fulaij, CEO – Kuwait, National Bank of Kuwait

How has NBK responded to the rising debt/asset impairment levels witnessed in the wake of the Covid-19 crisis?

The year 2020 was characterised by unprecedented challenges combined with a high level of uncertainty. NBK held up well in the face of extraordinary market conditions and clearly demonstrated its governance and prudent risk management.

Non-performing loans (NPLs) have slightly increased as a result of the impact of the pandemic on the operating environment, but we still carry a low NPL ratio by regional and international standards. Our coverage ratio is very comfortable with provisions carrying a surplus compared to IFRS9 ECL requirement.

The high level of uncertainty around the operating environment, alongside our fundamentally conservative risk practices, resulted in management taking a very conservative view on provisioning that in turn led to building even higher provisioning buffers at the peak of the crisis.

Such prudent proactive management practices have supported the legacy of the bank in maintaining strong asset quality levels at all times, similar to what happened during the low oil price and global financial crises.

Have NBK’s long-term objectives or its perspective on sustainability within the banking sector and its own business been altered by recent events?

During the health crisis, the bank remained on track with its strategy, did not deviate from its course, and demonstrated an operating model that proved more than capable of overcoming the challenges faced. NBK’s diversification strategy, which has included greater emphasis on wealth management, Islamic banking and a deeper geographic footprint, displayed resilience to the adverse conditions and in mitigating risk. 

Looking forward, technological and digital investments will remain the key drivers of the retention and acquisition of young clientele on the domestic retail front. The pandemic forced the group to remain agile in delivering on its strategic priorities, and this saw heavy emphasis placed on realising digital ambitions in order to maintain business operations while driving efficiency and ensuring uninterrupted service to customers. 

Another focus area is the growth of our Islamic subsidiary, Boubyan Bank, as a means of strengthening our domestic market position in Kuwait, and expanding our Islamic banking presence outside Kuwait.

How is the lack of a new public debt law affecting the Kuwaiti financial sector?

It is clear from recent public announcements by government officials regarding the exhaustion of the General Reserve Fund that the situation is critical and requires immediate corrective measures to keep fiscal stability intact.

Approving a new debt law and accelerating the reform process should be priorities to avoid liquidity shortages and to put the fiscal position on a sustainable path. The previous sovereign downgrades in 2020, including the recent one by S&P, may provide a trigger for undertaking fiscal reforms. However, fiscal measures will not be sufficient by themselves to provide the needed resources for the budget in the short-term.

Moreover, the debt markets are relatively more favourable now and we believe there will be very good demand for an issuance from Kuwait. We have seen this in previous sovereign transactions. These favourable market conditions will most likely make it less costly to borrow than to continue servicing the deficit through drawdowns or liquidation of reserves.

Additionally, the country needs to establish a yield curve for the sovereign issuance as this will be a strong reference for all long-term pricing. A potential sovereign issuance will keep Kuwait engaged with international capital markets and enhance the country’s profile with global investors.

Addressing structural imbalances in the state budget and finding sustainable solutions to meet financing needs and covering the increasing budget deficit are necessary steps towards long-term sustained growth.

In years where Kuwait has witnessed high infrastructure project awards and execution levels, growth trends in the non-oil sector have been promising, adding value to GDP away from oil. Thus, a clear determination to diversify the economy and accelerate the adoption of a comprehensive agenda that supports growth for the non-oil sector is key in financing opportunities for banks.

Does NBK expect the rising imbalance of Kuwait’s budget to lead to a renewed focus on project finance by means of public sector participation models?

As the ability of the government to self-finance projects becomes harder to bear, the participation of the private sector will definitely be the focus.

Kuwait’s 2035 vision aims to transform Kuwait into a financial and trade hub regionally and internationally, becoming more attractive to investors. Towards that target, the private sector should lead the economy, creating competition and promoting production efficiency. The creation of the Kuwait Authority for Partnership Projects was only the beginning of the journey, and the success of projects that were public-private partnership-structured is testimony to the ability of the private sector to support that vision.

The Kuwaiti banking sector sits on high levels of capital, liquidity and profitability ratios, enabling banks to extend their participation in project financing. We witnessed a big shift in the strategy of Kuwait Petroleum Corporation and its subsidiaries, for instance, when it came to financing in recent years; and NBK was and continues to be the largest player in the Kuwaiti market to secure participation in the large ticket financing deals.

How is the emergence of new financial technology affecting the way NBK interacts with its clients and customers?

Digital transformation is a main pillar of our long-term strategy. We are poised to realise our future ambitions, thanks to putting digital initiatives at the top of our priorities, especially in retail banking.

Our digital transformation programme has the dual impact of improving efficiency of operations by building on the introduction of robotic process automation and artificial intelligence capabilities, and controlling costs as we place heavy emphasis on technology to achieve regional leadership.

We are tirelessly working to prepare for the next generation of FinTech trends. We established our Digital Factory in Kuwait to support our digital transformation agenda across the group. The Digital Factory will increase our chances to engage and partner with FinTechs, rather than competing with them, as they provide the agile platforms needed for product innovation.

To optimise the cooperation with FinTechs, the regulatory framework should level the playing field through laying down the foundation and regulations on FinTechs’ operation in the market. 

On the regulatory front, CBK launched a Regulatory Sandbox framework to provide a safe space for testing innovative financial services and products in a manner that preserves the integrity of the financial system without impeding innovation.

CBK is also setting the infrastructure for a digital economy by developing a Kuwait National Payment System, to provide real-time payment services in a FinTech safe and supportive environment.

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