Kuwait banks can withstand shocks: IMF

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At the end of 2009, Kuwait's banking sector had a combined capital adequacy ratio of 18 per cent, far higher than the 12 per cent level required by the Gulf country's central bank, the IMF said in a study on Kuwait.

Citing official figures, it said the profitability of the Kuwaiti banking system has declined sharply since 2007 mainly because of a large increase in NPLs and provisioning, and heavy losses incurred by one large bank in 2008.

Return on equity (ROE) plunged to seven per cent in 2009 from 29.4 per cent in 2007, and net income nearly halved, the report said.

"The cost to income ratio deteriorated. The stress tests indicate that the banking system could broadly withstand significant shocks, although some banks appear vulnerable to extreme macroeconomic shocks."

However, the asset quality of the banking sector deteriorated markedly in 2009, with the NPL ratio almost doubling to 9.7 per cent from 5.3 per cent in 2008, due to the general macroeconomic deterioration and high exposures to real estate sector and distressed ICs, and, to a lesser extent, the two troubled Saudi conglomerates Saad and Algosaibi, the report said.

Banks' assets are predominantly domestic (80 percent), and external exposures are limited, it said, adding their main source of funding are domestic deposits.

"Although the coverage ratio (specific provisions to NPLs) declined to 38.5 per cent from 41.6 per cent in 2008, total provisioning (including precautionary) increased in 2009.... the Kuwaiti banking system appears liquid and insulated against foreign exchange (FX) risk, but exposed to equity risk," it said.

The IMF said it believes the banks' balance sheet composition indicates adequate asset liability management. But it noted that equity exposures, both in the form of direct investments and collateral held against credit facilities, accounted for 68.5 per cent of shareholders' equity capital in 2009.

"Under the intermediate shock scenario, none of the banks loses its entire capital, but three of the largest banks fall below the minimum regulatory capital of 12 per cent. The recapitalisation needed to restore the CAR to the 12 per cent minimum requirement is estimated at 0.9 per cent of GDP," it said.

"Under the severe case scenario, one medium-sized bank would lose its entire capital, while the CAR of three of the largest banks would fall below eight per cent. The maximum amount for recapitalisation under this scenario is estimated at around 3.8 per cent of GDP."

The report showed that single factor stress tests highlighted risks related to the banking sector's high exposure to the real estate and construction sectors. "Deterioration in the quality of loans to these sectors would have the largest impact on banks' solvency. This test assumed a 50 per cent haircut on the value of the underlying collateral, which reflects the long and complex foreclosure procedures, and the current illiquidity of the real estate market," it said.

"Market risk stress tests suggest that equity risk represents the most significant risk. The direct impact of exchange and interest rate shocks appears limited due to marginal FX net open positions, and adequate asset liability management."

The IMF said a liquidity stress test was carried out to test banks' capacity to withstand a deposit run over a period of five days without external financing.

"The results indicate that banks could withstand a substantial deposit run for the five days, without a need for external financing due to adequate liquidity buffers."

The IMF study echoed views by a key Western financial group, which said Kuwait banks were heavily exposed to real estate and construction sectors.

 "In Kuwait, the banking portfolio is highly exposed to the real estate and construction sectors, which together account for close to 50 per cent of total loans," the Washington-based Institute of International Finance (IIF) said.

"However, Kuwaiti banks are highly exposed to investment companies (12 per cent of total loans), which proliferated in recent years with inadequate controls.

The stressed domestic investment companies have put strains on the banking sector during the current crisis."

By Nadim Kawach

© Emirates Business 24/7 2010