ShareOPEC agreement supports oil prices, govt revenues
KUWAIT: Central Bank of Kuwait's profitability is likely to stay healthy on back of better economic conditions, marginally higher interest income, improved credit off-take, lower provisions and a modest increase in non-performing loans, said Central Bank of Kuwait (CBK) Governor Mohammad Al-Hashel in a press release on Wednesday on the occasion of the CBK's 2018 financial stability report. He stated that liquidity levels will also remain comfortable, and resumption in government debt issuance (subject to the passage of public debt law) will offer banks additional opportunities to invest in risk free government paper.
In view of the foregoing, the domestic banking sector is generally well placed to remain resilient in the near term, he said, noting that the risks emanating from banks' foreign operations can increase, particularly in countries with challenging security and/or economic conditions. Financial buffers help the government adopt a countercyclical fiscal policy, increasing public sector wage bill will make the future path less sustainable. The OPEC agreement of December 2018 and its extension in mid-2019 for another nine months has supported oil prices and government revenues, providing further breathing space, he said.
Yet only comprehensive fiscal and structural reforms will eventually enable Kuwait to wean itself off oil dependence. Thanks to its enormous financial savings and low public debt, Kuwait can afford the reforms to be smooth and gradual as long as the measures are sustained, Al-Hashel added. Banking system assets, on consolidated basis, grew by 4.3 percent in 2018 on the back of higher private sector credit off-take, he said, adding that lackluster growth in investments amid non-issuance of public debt weighed down on overall asset expansion.
Still, domestic credit by Kuwaiti banks was up 4.9 percent, compared to 3.9 percent observed in 2017, the CBK governor pointed out. Credit to the real estate sector, on the other hand, contracted by 0.7 percent after growing by 4.4 percent in 2017, notwithstanding the strong recovery in real estate market which picked up pace as the year drew to a close, he said. Growth in banks' investments plateaued amid non-issuance of domestic sovereign bonds after the expiry of public debt law in late 2017. Reflecting a bid to search for alternatives, lending to other banks increased sharply, making it the third key recipient of fresh lending in 2018.
Likewise, banks' investments in other fixed income securities as well as to the GCC increased. While the growth in banks' consolidated deposits moderated to 2.4 percent as deposits from abroad contracted by 1.9 percent, the banking system continued to enjoy a stable funding base with time deposits accounting for 66 percent of the total deposits, Al-Hashel said. Asset quality of the banking system has visibly improved over the years, exhibited by a steady decline in both the gross and net non-performing loan ratio (NPLR).
The gross NPLR, on a consolidated basis, further dropped to a historically low level of 1.6 percent (1.3 percent on domestic, Kuwait-only basis) as of December 2018, well below 3.8 percent observed in 2007 before the global financial crisis struck, he added. The impressive progress in bringing down the NPLR over the current decade is particularly evident if the existing NPLR (1.6 percent) is compared with the double-digit NPLR (11.5 percent) recorded in 2009. Still, the coverage ratio (available provisions to NPLs) remains robust at 254 percent (367.6 percent, if viewed on domestic basis), substantially greater than the pre-crisis ratio of 87 percent observed in 2007, he noted.
Banks' net income, on a consolidated basis, grew by 18 percent during 2018 compared to 9 percent a year earlier, lifting average ROA and ROE to 1.3 percent and 10.7 percent respectively, he added. Al-Hashel predicted that high provisions would continue to support an active write-off policy, helping banks avoid any serious formation of infected loans on their books. He concluded by saying that ample provisions have already helped banks smoothly transition towards IFRS-9 rules where applicable (as banks are required to maintain provision under the CBK rules or the IFRS-9 standards.--KUNA
