Fintech will be a game-changer for Kuwait banks, says analyst

KUWAIT - Kuwait Financial Centre “Markaz” has recently held a presentation on “Kuwait Banking 2018 and beyond” in collaboration with Kuwait Banking Association (KBA) at Kuwait Chamber of Commerce and Industry.

The presentation was delivered by M.R. Raghu, Head of Research at Markaz and Managing Director of Marmore MENA Intelligence, a research subsidiary of Markaz providing services of financial research and analysis of economies, markets, and companies in the MENA region.

Raghu talked about the current scenario of Kuwait banking industry and provided insights on the various trends that will determine the industry outlook. According to Raghu, Kuwait banks are at an inflection point.

After years of underperformance relative to GCC peers, some green shoots provide positive guidance. Liquidity is abundant, and asset quality improvement is noticeable. The increase in Fed rates will increase the cost of funding through increased rates of interest paid on deposits, however the good share of unremunerated deposits should provide a good cushion.

Loan book growth has been tepid in the past (2.8%) and is expected to touch 4% in 2018-19 on the back of non-oil GDP growth and infrastructure investments. However, this loan growth will be enjoyed more by larger banks as they will be the only game in the town for larger borrowers and government projects.

Raghu said that another way of looking at this is defacto, they will capture the low risk projects and therefore can dictate prices. However, the medium and smaller banks will play out on the technology side taking advantage of tech savvy youth population. Banks will be limited in terms of risk funding due to pricing band mandated by CBK for short term and long-term.

Another concern is the exposure of Kuwait banks to real estate sector, both direct and indirect (personal loans). While the combined share of lending to real estate sector and personal installment was about 33 percent back in 2008, it now stands at 53 percent.

There will be a rise in the cost of risk of the bank in 2018 because of the adoption of IFRS 9 and the higher amount of restructured and past due but not impaired loans present in their balance sheets. However, the general provisions that Kuwait banks have accumulated over the years will help in a smooth transition to the new accounting standard.

Raghu added, “Kuwait also appears overbanked with a small population size and could benefit from consolidation as many banks lack sufficient scale. The environment for consolidation is stronger now than a decade ago”.

Further the seminar highlighted that the slowdown in economic activity in the past three years resulted in a slight increase in non-performing loans (NPLs) in first three quarters of 2017. However beginning fourth quarter of 2017 the NPL ratios will stabilize and subsequently improve in 2018 and beyond.

Conventional banking’s value chain essentially involves functions such as taking savings, providing loans and facilitating payments. In this value chain, at the most risk of disruption is the payments business model since it is the least capital intensive and most tech-intensive. While block chain and cryptocurrencies were the main competitors of brick-and-mortar banking, the local banks would cope with the FinTech competition either through collaboration or via cost-reduction measures.

The 2017 has seen an improvement in the overall profitability of the Kuwaiti banks due to increasing amounts of earning-generating assets and slightly higher interest margins. Raghu expect the trend to continue in the near term.