‘The banking sector in Kuwait is in a sweet spot’

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Show me the money: Kuwait’s banks are hoping to attract new investors © AFP

Theirs is one of the hottest cities on the planet, but Kuwait’s banks had a long wait for their day in the sun.

From 2011 to 2014, a succession of governments meant Kuwait’s public spending stagnated at a time when other Gulf countries were turbo-charging their economies — and their banks — with big infrastructure projects.

Now Kuwait’s banking industry is enjoying a renaissance, as long-awaited political stability has produced a flurry of public sector projects to be financed by banks and built by their customers.

Net profits at the biggest lender, National Bank of Kuwait, rose more than 13 per cent in the first half of this year, up from 9 per cent in the same period in 2017, fuelled by loan growth of 6 per cent, a figure many western banks would envy. The second-biggest bank, Kuwait Finance House, enjoyed a 16 per cent rise in net profits. “Kuwaiti banks are at an inflection point,” said Richard Groves, chief executive of Kuwait’s Ahli United Bank. “There are many reasons to be optimistic about the future given the growth in the economy and more favourable oil price”.

Capital markets reform, and the country’s recent addition to the FTSE Russell emerging markets index, mean banks expect a significant increase in trading and financing activities. Interest rate rises in the US are expected to feed through to Kuwait’s discount rate, which influences how much borrowers pay banks, giving banks higher margins. Even the spectre of penal loan-loss provisioning is fading, as new accounting rules bring Kuwait’s standard closer to the global norm.

“The banking sector in Kuwait is in a sweet spot relative to other banks in the region with a lot of upside to current performance trends,” said Shaikha Al Bahar, deputy chief executive of National Bank of Kuwait.

This revival comes after Kuwait relaxed the culture of aggressive regulation it had espoused for years.

The Kuwait Central Bank took a zealous approach to loan-loss provisioning, which hobbled the country’s banks with far bigger charges and worse profitability than their peers in other Gulf markets.

Regulation of foreign banks was equally rigorous — HSBC’s British Bank of the Middle East subsidiary was the only foreign player for decades before it left in 1971 following Kuwait’s decision to nationalise all foreign banks. When HSBC was allowed to return in 2005, it was limited to just one branch — as were all foreign banks until 2014.

Kuwaiti banks are at an inflection point

Richard Groves, chief executive of Kuwait’s Ahli United Bank

Capital markets, which until recently have failed to thrive thanks to the country’s outdated regulatory regime and failure to make it into key global indices, are now also recovering. Kuwait recently revampedregulations for secondary market trading, allowing securities to be resold more easily.

Roger Winfield, HSBC’s chief executive in Kuwait, is enthusiastic about the potential for the country’s capital markets.

He expects Kuwait’s inclusion in the FTSE Russell index to drive about $1bn of new money into the market in the three months after it joins the index this month. Consultation has already started on its inclusion in the MSCI Emerging Markets equity index.

Although higher interest rates mean banks will be able to charge more on loans, not all analysts expect Kuwait to follow the US Federal Reserve’s moves. “The challenge is, we have seen instances in the last year when the [Kuwaiti] central bank did not increase the discount rate [after the Fed raised] because they didn’t want credit growth to get hampered by rising rates,” says Rahul Bajaj, an analyst at Citigroup. That left banks paying more for their funding, while not getting higher rates for their lending. “If the central bank skips again it would create a margin issue for the banks,” he adds.

Credit growth is central to the outlook for Kuwait’s banks. Raghu Mandagolathur, an executive vice-president at Markaz, an asset management company, describes government spending on development plans and support for small and medium-sized companies, as the “key source for banks’ credit”, noting that Kuwait’s banks “have limited sectoral or geographic diversification”.

NBK’s Ms Al Bahar says there is “always more to be done” to stimulate private sector credit. “We still need more investment opportunities for the private sector including privatisation projects and PPP [public private partnership] initiatives.”