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‘Residential real sector still going strong’
KUWAIT CITY, April 19 : S&P Global Ratings expects the operating environment for banks in Kuwait to improve (A-1/negative/A+) in 2022 thanks to higher oil prices and continued recovery from the Covid-19 pandemic, but with some restrictions remaining, the financing strategy remains, reports Al- Anba daily. The public finances of the Kuwaiti government are unclear, as the debt law has not yet been adopted. Moreover, the government’s main liquidity reserve — the General Reserve Fund — has experienced a significant decline. However, reports of late payments to public bodies and suppliers surfaced earlier this year, as was the case before the setbacks associated with the Covid- 19 pandemic.
The agency said that non-performing loans were low in the Kuwaiti banking sector when the Covid-19 pandemic spread in 2020, and the high provisioning margins that banks had allowed to write off exposures with manageable negative effects on profits and asset quality, and “we now expect non-performing loans and the cost of risk gradually to return to normal levels, thanks to a more supportive economic environment, and we expect higher interest rates to support banks’ profitability. However, significant structural exposure to real estate and construction (about 30% of bank lending) remains a major risk,” said the agency sources.
The report indicated that financing conditions remain favorable in Kuwait, supported by stable deposits from the retail sector and government-related entities, and it remains to be seen whether the increase in interest rates will lead to the conversion of some non-interest-bearing deposits into interest- bearing products. Moreover, “we see some improvement in bank reports. However, we see that the quality and transparency of the data are still lagging behind the levels of international standards.” On the other hand, the agency said, the residential real estate sector (citizens’ housing) is still strong. In general, “we do not see that this sector constitutes a source of risks for banks, because loans are granted against the salaries of Kuwaiti citizens.
Similarly, the investment sector (mainly rental apartments for expats) is slowly recovering from last year’s situation as a result expats leaving the country in light of the repercussions of the Covid-19 pandemic. The sources said, the sector is expected to continue to recover over the next 12-24 months, driven by the improvement in the economic outlook and, to some extent, the return of expatriates. Additionally, there is an increase in the demand for apartments from Kuwaitis if the mortgage law is adopted, given the continuing rise in villa prices. The commercial real estate sector (mainly offices and malls) remains under pressure due to weak office demand and the shift to online retail in the wake of the pandemic with oversupply. Thus, this sector may become the most likely source of non-performing loans for banks.
The agency added, the total exposure of banks to real estate and construction work was about 30% of total lending at the end of 2021 and part of this exposure is due to companies with diversified sources of income, so “we expect non-performing loans to diminish. We expect a slight decrease in non-performing loans over the next 12-24 months and a stabilization of the cost of risk at around 100 basis points – some provisions in Kuwait are done mechanically as per Central Bank rules, this is less than the 1.4% cost of risk ratio in 2020 and is comparable to 0.9% In 2021 (calculated on banks that account for 60% of the local market share).” The higher provisioning margins will allow the banks to maintain significant stability in the ratio by writing off their non-performing loan balance whenever new non-performing loans form. The agency indicated that the strong domestic deposit base supports the financing position in the sector, as the contribution of individual deposits exceeded 40% of the total deposits at the end of 2021.
The banks were in a net foreign asset position of 14% of domestic lending at the end of last year. This translates into a weak impact on the sentiment of foreign investors or the expected increase in the cost of foreign financing. Sector deposit rules remain somewhat focused on individual names, but we understand that most large depositors are either large Kuwaiti groups or government linked entities, which indicates some stability. The agency “S&P Global Credit Ratings” stated that its negative future view of the sovereign credit rating is linked to the government’s willingness and ability to provide financial support, despite the strengthening of public finances and the balance of payments as a result of the rise in oil prices in Kuwait during the period 2022-2023, the financing strategy remains medium. The term of the government is uncertain.
The General Reserve Fund has dwindled and the new debt law has not yet been adopted. So far no other financing arrangements have been made such as giving the government direct authority to use a specific portion of the money from the Future Generation Fund’s. However, despite the long standoff between the executive and legislative branches and reports of late payments to suppliers, we still assume that the government will overcome institutional constraints and have a mechanism to access the FGF if there are no other options.