LIMASSOL, March 15: Moody’s Investors Service has maintained its stable outlook for Kuwait’s banking system, refl ecting the rating agency’s view that government- funded projects will drive economic growth, and subsequently business for banks. This will soften the impact of declining consumer spending, as subsidy cuts take hold.
The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Kuwait over the next 12-18 months. “A record amount of projects under execution will create corporate lending opportunities for banks. We expect 6%-7% credit growth over the outlook horizon of 12 to 18 months. The risk of project holdups going forward has increased, however, with the election of a new parliament in late 2016 in which government opposition groups won a large representation,” says Alexios Philippides, an Assistant Vice President at Moody’s. “We also forecast higher problem loan formation, albeit from low levels, and non-performing loans to rise to 3% of gross loans over our outlook horizon from 2.5% for rated banks as of end-2016.
However, banks maintain strong buffers against potential losses, in the form of solid capital adequacy and a growing cushion of general provisions, which amounted to around 4% of gross loans as of end-2016,” says Philippides. Moody’s report, entitled “Banking System Outlook — Kuwait: Government Projects and Strong Bank Buffers Anchor Stable Outlook,” is available on www.moodys.com.
The rating agency’s report does not constitute a rating action. Moody’s considers that the banking system will maintain its substantial capacity to absorb unexpected losses, refl ected in an aggregate Basel III Tier 1 capital ratio of 15.9% at end-2016, underpinned by a conservative implementation of Basel requirements. Moody’s says net profi tability will remain broadly stable, with the system’s net income at 1.0%-1.2% of average assets. While net interest and fee income will grow, banks will continue to book high provisions.
Margins will start to improve following benchmark rate rises. Market funding reliance will increase, according to Moody’s, as deposit growth will be sluggish due to low oil revenues. Core liquid assets, which represented 28% of total assets at end-2016, will remain ample however.
Moody’s also expects that Kuwaiti banks will continue to operate in a very high support environment, as the government stepped in to provide capital in the past and can continue to call on large accumulated fi nancial assets managed by its sovereign wealth fund to do so. Moody’s has revised its outlook for the Saudi Arabian banking system to stable from negative.
The stable outlook reflects high risk-absorption buffers and easing funding pressures, as Saudi banks’ credit profiles are expected to remain broadly stable over the next 12 to 18 months, says Moody’s Investors Service. “Despite low oil prices, which we expect to fluctuate between $40 and $60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending. As a result Saudi banks’ liquidity and funding conditions will improve. Although profitability and loan performance will continue to soften, Saudi banks will maintain robust capital and loss absorption buffers compared to regional and international peers over the outlook horizon.” says Olivier Panis, a Vice President at Moody’s. According to Moody’s, the operating environment for Saudi banks will recover.
Whilst the rating agency expects real GDP growth to contract by -0.2% in 2017, increased government spending and projects to diversify economic output will support a gradual recovery of the non-oil economy, which will grow by 2% in 2017 versus 0.2% in 2016. Consequently, Moody’s expects credit growth to remain low at 3% in 2017, but to gradually pick up from 2018. Banks will maintain a solid operating performance, although subdued loan growth, rising provisioning charges and lower fee and commission income will weigh on profits. The impact will be partly mitigated by stable margins, low operating costs and easing pressure on funding costs. Despite Moody’s expectation of reduced profitability, subdued loan growth will support capital adequacy, which will strengthen from already strong levels.
Moody’s anticipates the sector’s average tangible common equity (TCE) ratio will increase to around 17% by the end of 2018, up from around 16.2% in September 2016. Moody’s says that access to funding will improve owing to liquidity injections from international sovereign debt issuances, the clearing of large volumes of overdue payments to contractors by the government in Q4 2016 and modest credit growth. However deposit growth will remain low until economic activity picks up more materially in 2018.
Moody’s expects Saudi authorities’ willingness and capacity to provide financial support to the local banks to remain high, but notes that the policy stance of the Saudi authorities may evolve as the regulator is contemplating the adoption of the Financial Stability Board’s best practice on the resolution of distressed banks.
Funding pressure to ease
Stabilising oil prices, large international sovereign debt issuances and lower credit growth will improve funding conditions for banks in the Gulf Cooperation Council (GCC) over the next 12 months, says Moody’s Investors Service in a report published today. Price stabilisation between $40-$60 per barrel will improve oil revenues, supporting government and corporate deposits in the region’s banking systems. International debt issuance will also support deposits, while slower economic growth will subdue lending activity and reduce funding pressures for banks. “Omani and Qatari banks will benefit the most from easing funding conditions, followed by banks in Saudi Arabia and the United Arab Emirates,” says Mik Kabeya, Analyst at Moody’s.
“However, Bahraini and Kuwaiti banks will continue to have the strongest funding and liquidity profiles in the region.” Omani and Qatari banks will benefit the most from the expected easing of liquidity, since they have been among the least resilient to a prolonged period of low oil prices. Both banking systems face funding pressure as refl ected by loan to deposit ratios of 103% and 104%, respectively, at June 2016. However, the Qatar government (Aa2 negative) has higher financial reserves than the Oman government (Baa1 stable), providing it with a higher capacity to support local liquidity if necessary. Funding conditions will stabilise for banks in the United Arab Emirates, which have a net loans to deposits ratio of 94% as of June 2016.
The funding squeeze experienced by Saudi banks since 2015 will ease, given the government’s payment late in 2016 of around $28 billion of overdue contractors bills and Moody’s expectation of low credit growth. In addition, Saudi banks will maintain ample liquidity buffers. Kuwaiti banks will remain primarily deposit funded and well-cushioned by liquid assets that amounted to 36% of tangible banking assets in October 2016. The banks are among the most liquid in the region, with a combined net loans to deposits ratio of 82% as of June 2016. Bahraini banks will continue to exhibit one of the strongest funding and liquidity position in the region, with a net loans to deposits ratio of 76% at June 2016 and modest loan growth that will require low levels of new funding.