Moody's Investors Service' outlook for Kuwait's banking system remains stable, reflecting the rating agency's expectation of continued government spending and growing loss-absorbing buffers, which will allow banks to manage modest new problem loan formation and balances an increase in market funding reliance that the rating agency expects in the context of low oil prices.
The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Kuwait over the next 12-18 months, according to Moody's report, entitled "Banking System Outlook - Kuwait: Government Spending and Growing Loss-Absorbing Buffers Drive Stable Outlook’.
"Spending by the Kuwaiti government, even as oil prices stay low, will maintain growth momentum and support operating conditions for the country's banks," says Alexios Philippides, assistant VP-analyst at Moody's.
"Execution of the government's new five-year development plan will drive new business for banks, while domestic consumption will remain strong, supporting our projections of 7 percent credit growth."
While the country's economy remains highly dependent on oil — contributing over two-thirds of government revenues and accounting directly for around 45 percent of GDP in 2015 — policymakers are pushing ahead with non-oil related infrastructure projects, as noted in May 2016.
Furthermore, enhanced loss absorption buffers, by way of stronger capital levels (with a Basel III Tier 1 ratio of 15.3 percent at year-end 2015) and a growing cushion of general provisions — 3.8 percent of gross loans as of year-end 2015 — will allow Kuwaiti banks to manage new problem loan formation, which the rating agency expects to be modest.
Nevertheless, downside risks to asset quality will remain elevated, owing to high credit concentration and banks' exposure to real estate and equity markets. Direct exposure to the real estate sector accounted for 24 percent of banks' loan books as of March 2016 and real estate transactions by value have continued to moderate compared to a very strong performance in 2014.
The rating agency forecasts non-performing loans (NPLs) of around 3-4 percent of gross loans for 2016-2017, from 3.3 percent for rated banks at year-end 2015.
Profitability will likely remain relatively unchanged, with the system's net income to average assets at just over 1.1 percent during the outlook period.
"While net interest and fee income growth will be strong, Kuwaiti banks will continue to book elevated provisions - both domestically and abroad - that had consumed roughly 33 percent of pre-provision income in 2014-2015," explains Philippides.
"Margins will remain broadly stable as longer term government issuances to fund the fiscal deficit and higher yields on lending will counter higher cost of funds," he adds.
Moody's also notes that Kuwaiti banks are better placed to weather the period of tightening liquidity in the Gulf region than regional peers.
Though market funding reliance will increase, as loans will grow faster than deposits, Kuwaiti banks will remain primarily deposit funded and liquidity buffers will remain comfortable.
Finally, Moody's expects the Kuwaiti government to remain committed and able to support banks, if needed, despite current fiscal pressures.
The government has stepped in to provide capital in the past and can call on financial assets managed by the country's sovereign wealth fund - estimated at $600 billion at end-June 2016, which is more than five times the size of the country's GDP.

Source: Arab News