KUWAIT BANKS WILL FULLY RECOVER DURING 2022

  • 28/07/2022

Kuwait City:  "Standard & Poor's" reported that the continuation of recovery in the oil markets and the rise in its prices reinforce the most important fundamentals of Kuwaiti banks, especially with regard to their assessment of the state's risks in the Kuwaiti banking industry, known for its acronym "BICRA".


In the context of its report on global banks for the second half of 2022, the agency said that macroeconomic expectations, high oil prices and rising interest rates all combine to enable Kuwaiti banks to walk the path of recovery in a flexible manner.

Standard & Poor's expects the sector to achieve a rise in profitability over the next year, and that it will fully recover in 2022, supported by high profit margins as banks tend to raise interest rates and reduce credit fees in their balance sheets.

The agency said that the measures of asset quality tend towards the normal situation, while it expected that the emergence of non-performing loans will diminish, which will witness a slight decline during the next 12-24 months, while the cost of risk remains at about 100 basis points, given that some provisions that are built in the Kuwaiti banking sector It is considered mechanical according to the instructions of the Central Bank of Kuwait.

It added that this cost is 1.4% less than it was in 2020 and compared to 0.9% in 2021, (and this percentage is calculated on banks that account for 60% of the local market share), and that the high provision balances of banks would enable them to maintain a stable cost-risk ratio on a large scale by writing them off from non-performing loans when new ones emerge.

The agency indicated that the total exposure of banks to real estate and the construction sector amounted to about 30% of total lending at the end of 2021, and that the commercial real estate sector (mainly offices) is still under pressure, however, the investment sector is mainly represented in the rental of residential apartments Expatriates are recording a slow recovery, and we expect this sector to continue to recover over the next 12-24 months, driven by stronger economic prospects, with expattriates expected to return to some extent.

The agency believes that the financing file in the Kuwaiti banking sector is gaining through a strong domestic deposit base, as the agency estimates that retail momentum deposits contributed more than 40% of the total deposits at the end of 2021, and the percentage of net external assets of banks reached 14% of domestic lending at the end of the year In the past, this translates into weak exposure to investor sentiment and the expected increase in the cost of foreign financing.

The agency stated that the rise in oil prices and the increase in its production volumes should encourage growth to recover during the current year, which leads it to expect that Kuwait will achieve a large surplus in the government budget during 2022, after it had been suffering from an annual deficit of an average of 15% of GDP for the five years. However, given the tendency of oil prices towards moderation, we expect the budget to return to deficit during the 2024-2025 fiscal year.

As for the government's willingness and ability to provide financial support to banks, the agency said that despite the rise in oil prices that led to the strengthening of public finances and the balance of payments in Kuwait during the period from 2022 to 2023, the government's long -term financing strategy is still uncertain, as the main liquidity reserve represented by the General Reserve Fund has diminished as a result of the non-approval of the debt law so far, while other financing arrangements, including direct government access to financing within a certain amount from the Future Generations Fund, have not yet been established.

However, despite the constant confrontation between the executive and branches and the reporting of late payments to suppliers, the agency assumes that the government will overcome institutional constraints and will find the appropriate mechanism to reach the fund for future generations if other options are not available , and the current high oil prices should support the assets General reserve fund that depleted in the previous period.

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