The full-year 2020 financial performance of Kuwaiti banks should remain broadly in line with 2019, the report added.
Asset quality and NIM Compression
Cost of risk (CoR) for Kuwaiti banks should further decrease to below 90 basis points (bps) for 2020 on the back of steady accumulation of provisions thanks to conservative Central Bank of Kuwait (CBK) regulations and reducing non-performing loans (NPLs) over the past few years
“We anticipate relatively stable NPLs of 2 percent of total loans in 2020, with coverage remaining well above 200 percent for the sector. This compares with NPLs of 9 percent in 2010 and more recently 1.8 percent at Sept. 30, 2019, and 2.0 percent at Sept. 30, 2018.”
The report expects a 10 bps decline in net interest margins (NIMs) in 2020, due mainly on pressure from asset yields due to the U.S. Federal Reserve rate cuts in 2019.
Combined with the lower CoR, bottom-line growth for rated banks should be in the mid-to-single digits in 2020, which is in line with consolidated risk-weighted asset growth.
S&P Global Ratings expect total credit growth of 4 percent-5 percent in 2020 versus an average of 4 percent for the past three years. Corporate lending will drive credit growth, stimulated by government projects. However, despite a modest recovery in government project launches in 2020, the effect on sector lending depends on the government's financing plans.
According to MEED Projects, some Kuwaiti dinar (KWD) 8 billion of government projects are planned for 2020, mostly in the petrochemical sector. This compares with an initially planned KWD4.4 billion at the start of 2019.
On the retail side, loan growth is expected to be lower as the impact from lifting the consumer lending cap wears off, although this could be offset by higher loan installments.
Concentration in the commercial real estate (CRE) segment remains a key credit risk for banks, the report said. “Nevertheless, we expect the current real estate price correction period to end in the next 12-24 months, with a limited effect on the banking system.”
Strong domestic deposit base
Kuwait’s banking sector has very low external debt and displays an overall net external asset position due to the strong domestic deposit base. “Furthermore, we note that the share of government and government-related entity deposits has stood in a narrow range of 15 percent-17 percent since 2012, despite oil price volatility.”
The average long-term rating on banks in Kuwait was 'BBB' at Feb. 9, 2020, the same level as last year.
“This was in line with our outlooks, which were stable, and is predominantly due to strong government fiscal and external buffers, solid funding profiles, and the accumulation of provisions, which supports banks' balance sheets.”
(Reporting by Brinda Darasha, editing by Seban Scaria)
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