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Monday , September 26 2022

Moody’s outlook on Kuwait banking system stable

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LIMASSOL, March 14: The outlook for Kuwait’s banking system is stable as the credit standing of Kuwaiti banks will be supported by steady nonoil economic growth and solid financial fundamentals over the next 12 to 18 months, says Moody’s Investors Service in a report published today.

The report, “Banking System Outlook — Kuwait; Economic growth, solid capital and ample liquidity drive stable outlook,” is now available on www.moodys.com. Moody’s subscribers can access this report via the link at the end of this press release.

The research is an update to the markets and does not constitute a rating action. Moody’s forecasts non-oil GDP growth of 3.5 percent in 2018 and 4.0 percent in 2019 driven by growing government spending. The rating agency expects annual domestic credit growth of around 6 percent over the next 12 to 18 months. Household credit growth will be the key driver on the back improving economic sentiment and steady employment growth.

While corporate credit growth will be slower, due to corporate repayments and moderation in the development project space, banks will still find opportunities for corporate credit and non-cash business arising from substantial active projects. “Nonperforming loan levels will stabilise at around 2 percent of gross loans amid favorable domestic conditions,” said Alexios Philippides, an Assistant Vice President and analyst at Moody’s.

“We also believe that banks have cleaned up their portfolios before this year’s implementation of IFRS 9 accounting standards by mobilising the large pool of general provisions accumulated in recent years, which will help limit impairments going forward.” The main risks for banks are adverse domestic political and geopolitical developments or renewed weakness in oil prices, factors that can dampen confidence and subdue equity markets and the real estate sector, to which banks are exposed to, potentially reducing business growth and pressuring banks’ asset quality.

Kuwaiti banks, however, maintain strong loss absorption buffers, with the system’s Basel III Tier 1 capital ratio at 15.8 percent as of December 2017. The rating agency also says that significant general provisions will allow banks to migrate to IFRS 9 without a negative impact on capital. Bank profitability will improve on wider net interest margins and lower credit costs.

The ratio of net income to tangible assets will increase to around 1.3 percent over our outlook period, from 1.1 percent in 2017. Moody’s also expects that growth in deposits together with current excess liquidity will allow banks to grow their loans without increasing their reliance on confidence-sensitive market funding over the 12-18 month outlook period.

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