Loan portfolio grows 5% to record KD 26.9b Personal facilities up by 19.5 pct

KUWAIT CITY, Feb 18: Credit facilities extended by Kuwaiti banks have gained momentum during 2012 compared to marginal growth rates recorded during 2011 and 2010. The loan portfolio of Kuwaiti banks grew at 5 percent in 2012 to record KD 26.9 billion ($ 95.4 billion) at the end of December-12 representing around 54 percent of 2012 forecasted GDP.  This growth rate is favourably compared to the 1.6 percent and 0.4 percent recorded during 2011 and 2010, respectively. Despite the low appetite for credit, banks’ conservative lending policies, and the restructuring of corporate debt along with delay in implementing a dozen of infrastructure and economic projects, the credit market has witnessed signs of recovery in 2012 that will most likely continue through 2013 driven by the easing of political tension in the country along with the gradual restoration of confidence in the private sector and the recovery of the property market and the local bourse.

During 2012, banks have extended additional credit of KD 1.28 billion ($4.5 billion) with personal facilities contributing to around 87 percent of this increase followed by the credit to the real estate sector and trade which added around KD 378 million and KD 171 million, respectively.
On the contrary, credit to investment companies shrank by KD 475 million on the back of continuing debt problems faced by the sector. Driven by the increase in the salaries of the public sector and the strengthening of purchasing power of Kuwaiti nationals, personal facilities have been following a continuous upward trend since February 2011, increasing by 19.5 percent to record KD 10.1 billion at the end of December-12, representing 37 percent of banks’ loan portfolios.
During 2012, personal facilities grew at 12.4 percent fuelled by high consumption and robust growth in the retail sector accompanied with the significant increase in public sector salaries.

However, growth in credit facilities for the purchase of securities, which account for 27 percent of personal facilities, remained stagnant during 2012 at 2.5 percent. Nonetheless, the share of this credit component remains high as it accounts for around 10 percent of local banks’ loan portfolio at KD 2.71 billion ($9.6 billion). This high concentration might expose banks to further risk given the volatility in the local and regional markets.
Following 5 consecutive years of strong growth rates over the period 2004-2008 with a CAGR of 34.5 percent fuelled by buoyant market and ample liquidity, growth in credit to the purchase of securities slowed down significantly during 2009 to 1 percent and then followed a downtrend in 2010 and 2011 with a yearly contraction of 4.6 percent and 2.1 percent, respectively.
This drop came on the back deleveraging amid high market risk and volatility in local and international markets. This made banks shift their lending policy by extending credit to households and the productive economic sectors guaranteed by sustainable cash flows.

Chart 2 depicts the share of loans utilized for the purchase of securities to total personal loans since Dec-05 indicating a slowdown in contribution mainly due to deleveraging of retail investors who are invested in the stock market coupled with banks’ being more conservative in extending credit after the global financial crisis. Loans to the purchase of securities peaked in September-2008 to account for 36 percent of banks’ personal loans portfolios and then followed a downward trend to stand at 27 percent as of Dec-12. The contribution of Loans to the purchase of securities of banks’ personal loan portfolio has averaged around 30 percent based on monthly figures since Dec-2005 which is considered high on the international standard.
On the other hand, chart 3 depicts the share of personal loans to banks’ loan portfolio since Dec-05 indicating a slowdown in contribution in the early years before stabilizing from the period 2008-2011 and moderately picking up in 2012. As seen in chart 4, During the period 2005-2012, bank’s loan portfolio grew at a 7-year CAGR of 12.5 percent from KD 11.8 bn at the end of Dec-05 to reach KD 26.9 bn in Dec-12; while personal loans grew at a slower 7-year CAGR of 10.1 percent from KD 5.1 bn to reach KD 10.1 bn over the same period.

Loans to the real estate and construction sectors, which together amount to KD 8.85 billion accounting for 32.9 percent of banks’ loan portfolios, gained momentum during 2012 and advanced by KD 407 million, a growth of 4.8 percent; Chart 5 shows that since 2008, growth in the real estate loans has started to lose momentum driven by the slowdown in property market and the depreciation in asset prices.
Following a 3-year CAGR of 40 percent over the period 2004-2007, growth in loans to the real estate & construction sectors dropped sharply to 17 percent in 2008 then to 10 percent in 2009 and remained flat in 2010. Given the slowdown in the real estate market and the challenging business environment faced by real estate companies and contractors, high exposure to this sector by banks indicates that further correction in the real estate market might expose local banks to higher credit risk and weigh down on asset quality.
The following chart illustrates the combined share of loans to real estate and investment companies to total bank loans over the period 2006-2012. The high concentration of banks’ loan portfolios in the real estate and financial services sectors which together accounted for an average of 42 percent of credit facilities over the last 7 years, is a clear signal of high risk embedded in the banking sector. As seen, since 2005 banks’ loan portfolios have been witnessing an uptrend and accordingly, the share of loans to real estate and investment companies has followed.

However, as the financial crisis deepened, credit facilities extended to investment companies began to decrease as ICs experienced the downfall of the stock market. On the other hand, loans to real estate and construction continued the uptrend yet at a slower rate as the property market witnessed a decline in prices driven by oversupply in the commercial segment.
As a result, credit facilities extended to these two sectors remained stagnant during the period from July-07 until Aug-11 comprising an average of 44 percent of total banks’ loans portfolios before slowing down to currently stand at 40 percent in Dec-12.
The most significant repercussion of the financial turmoil was the sudden evaporation of credit to investment companies (ICs) in the last quarter of 2008 that followed easy credit in the per-crisis era when loans to ICs grew at a CAGR of 55 percent over the period 2004-2007.

Since then, credit slowed down to 19 percent in 2008 and 1.2 percent in 2009 and then followed a steep downward trend in the years that followed dropping by 16 percent in 2011.
Banks remain cautious in extending additional credit to ICs given the challenging business environment and the deterioration in their financial standing and credit profile; accordingly, credit facilities to ICs fell during 2012 by 20 percent to KD 1.91 billion, representing 7.1 percent of banks’ loan portfolios down from a percentage contribution of 12 percent before the crisis.
We believe that banks’ non-performing loans of ICs will most likely remain high and as a result will continue to pressurize banks’ profitability in 2013 by booking additional provisions. However, liquidation of collaterals held against ICs credit along with debt restructuring remains the optimal options for some banks to avoid additional provision.

Since Dec-05, loans to trade and industries witnessed gradual growth to reach KD 2.5 billion and KD 1.8 billion, respectively. During the period 2006-2012, loans to trade grew at a CAGR of 8.8 percent whereas loans to industries grew at a much faster rate of 21 percent. However in 2012, loans to industries seemed to be stabilized as it grew at 1 percent compared to 8.2 percent in 2011 while loans to trade grew 7.4 percent in 2012 from 0.4 percent in 2011. Chart 8 illustrates loans to trade and industries share of banks’ loan portfolios since Dec-05 indicating that the combined amount for the two sectors has averaged around 15.5 percent of total banks’ credit facilities.
Share contribution has been quite volatile during the aforementioned period and has reached a low of 14.4 percent in March and April 2008, peaked during the financial crisis in Jan-09 to 16.2 percent before heavily slumping once again to 14.6 percent. Nevertheless, credit facilities extended to these two sectors began to recover gradually to currently stand at 15.8 percent as of Dec-12 after hitting a record high of 16.5 percent in August-2008.

Chart 8, which depicts the change in outstanding loans across the major economic sectors during FY-11 and FY-12, reflects a considerable growth in personal loans and credit to real estate sector and financing trade along with shrinking credit to ICs due to the strict lending policies followed by local banks and deleveraging in the financial sector. During 2012, credit to the real estate sector grew by KD 375 mn, while growth in personal facilities showed significant improvement to KD 1.1 bn fuelled by the increase in consumption and the reassessment of banks strategies that became more retail-focused. On the other hand, credit to ICs fell by KD 475 mn, indicating the deterioration in operating environment, weak financial standing of some major players along with the restructuring of some highly leveraged firms and the significant losses incurred by the sector originated mainly from drop in the prices of equities and real estate.


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