LIMASSOL, Nov 3: Moody’s Investors Service has maintained its stable outlook on Kuwait’s banking system, reflecting the rating agency’s expectation of sustained government spending, which will continue to underpin banks’ financial fundamentals. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in this system over the next 12 to 18 months.
“Government spending, accelerated implementation of infrastructure projects and strong domestic consumption will continue to support the banks’ favourable operating environment, despite lower hydrocarbon revenues,” says Alexios Philippides, an analyst at Moody’s.
Nonperforming loans (NPLs) will drop to around 3 percent of gross loans for 2015-16 — from 4 percent for rated banks at year-end 2014 — back to the levels recorded before the 2008-09 global financial crisis, and down from a peak of 10.2 percent in 2009. “Banks have made considerable progress in rehabilitating their loan books while benign operating conditions will help contain new problem loan formation,” explains Philippides. However, banks will remain exposed to high credit concentrations and to volatile equity and real estate markets. Likewise, downside risks to Moody’s outlook include potentially reduced investor and consumer confidence in the coming quarters stemming from uncertainty over the implications of low oil prices, which could lead to lower asset prices and reduced credit growth for banks.
Additionally, Kuwait’s banking system will maintain its substantial loss absorption capacity, underpinned both by robust capitalisation levels (Basel III Tier 1 ratio of 14.8 percent at end-2014 for rated banks) and improving total loan-loss reserves (equivalent to around 5 percent of banks’ gross portfolios and around 125 percent of NPLs for rated banks at end-2014).
Moody’s also expects net profitability to gradually recover on the back of lower provisioning burdens, with the system’s return on average assets (RoAA) improving to over 1.5 percent during the outlook period. “Formation of new NPLs will be low, and Kuwaiti banks have already booked substantial general provisions and made significant progress writing off legacy NPLs,” adds Philippides.
Furthermore, the Kuwaiti banking system will remain primarily deposit funded, at 81 percent of non-equity funding as of end-June 2015, and will continue to have comfortable liquidity buffers. However, Moody’s expects the flow of government-related deposits to slow down in the context of lower oil prices and for some banks to increase their market funding reliance.
Finally, Moody’s expects the government to step in and provide support to the banks if needed, able to call on financial assets managed by the country’s sovereign wealth fund — estimated at more than three times the size of the country’s GDP.