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Outlook for Kuwait’s banking system remains stable: Moody’s Non-oil GDP growth pegged at 4.4% in 2014

LIMASSOL, July 2: The outlook for Kuwait’s banking system remains stable, unchanged since 2011, says Moody’s Investors Service in a new report published today. The stable outlook reflects Moody’s expectation of a favourable domestic operating environment, underpinned by high oil revenues and government spending, which will support banks’ recovering profitability, robust capitalisation and ample liquidity. Over the outlook period, Moody’s expects net profitability to recover, as the provisioning burden of legacy problem loans continues to ease and increased cash flows of corporate borrowers will improve asset-quality and loan recoveries. However, high credit concentrations and undisclosed levels of restructured loans will also continue to pose downside risks for the system.

Moody’s expects Kuwait’s non-oil GDP growth to accelerate to 4.4% in 2014, the highest rate since 2007, driven by increased domestic consumption and higher capital spending by the government, as the state-led National Development Plan is gaining traction on the back of a more favourable political environment. These improved conditions will support higher credit growth of around 10%.
The stable outlook also reflects Moody’s expectations of further improvement in Kuwaiti banks’ asset-quality metrics. Banks have made considerable progress in rehabilitating their loan books following the 2008-09 crisis, as operating conditions have remained benign over the past three years. We therefore expect system-wide non-performing loans (NPLs) to decline to 3% of gross loans for the period 2014-15, down from 4.6% at year-end 2013 and a peak of 10.2% in 2009. Nevertheless, banks remain exposed to high credit concentrations and undisclosed levels of restructured loans.

Moody’s expects the banking system to maintain its substantial loan-loss absorption capacity, underpinned both by robust capitalisation levels (with a Tier 1 ratio of 16.2% at year-end 2013) and by improving provisioning coverage. Under Moody’s scenario analysis, the system holds sufficient buffers to absorb losses under the rating agency’s central and adverse stress scenarios.
Over the next 12-18 months, Moody’s expects the Kuwaiti banking system to remain primarily deposit funded and supported by comfortable liquidity.
Customer deposits accounted for 82% of non-equity funding, while liquid assets represented 32% of total assets by year-end 2013. Although high deposit concentrations from government and government-related entities will continue to represent a structural challenge, in Moody’s view, these deposits will remain a stable funding source over the outlook period.

Moody’s expects net profitability to gradually recover as the provisioning burden of legacy problem loans continues to diminish, with the system’s return on average assets improving to 1.3%-1.5% over our outlook period (compared to pre-crisis levels that exceeded 2%). Intense competition in a relatively low interest rate environment will continue to compress margins and pressure revenues, but the impact will be offset as business growth accelerates. Efficiency indicators will also remain at their current levels, with the cost-to-income ratio just below 40%, underpinned by Kuwait’s demographics (the Kuwaiti population is concentrated in urbanareas) and banks’ small branch networks.

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