2.9 Percent Interest On Government Deposits Doubled By Banks

One of the Kuwait Ports Authority's deposits in one of the banks has recently been renewed for one year and worth 80 million dinars, as the banks increased the pace of their competition for dinar deposits. This recently resulted in interest rates double those on funds held last time, indicating that the pricing of funds has risen at unprecedented rates.

A local Arabic daily reports that, according to reliable sources, there has been a substantial increase in the interest rate paid on the loan, which reached roughly 2.9 percent, up from about 1.7 percent previously.

It is likely that what made the new developments concerning banking competition for deposits in dinars more important was that they came this time from banks known for being conservative in pricing during the last period, in addition to the banking race for the KPA deposit, in which multiple banks offered comparable rates, setting interest rates at unprecedented levels before the Covid-19 pandemic.

The sources stated that the deposit was offered for renewal in an auction in which all Kuwaiti banks participated, with bids submitted in closed envelopes, with the second highest bid coming with an interest rate similar to that paid by the winning bank, which, by the way, is a traditional bank, however, the irony is that other banks offered a low price of 1.5 percent for the bidding.

This discrepancy is explained by the fact that the banks who offered low prices during the bid were merely demonstrating their presence before the government agencies that held the deposits, but they knew in advance that they were not going to win this deposit, so they offered those prices.

Taking into account that the possibility of the US Federal Reserve raising interest rates more than once this year fuels the fierce competition within the banking industry, each bank offered the price that meets its needs for these funds, not based upon the deposit prices that have circulated in the market in recent weeks.

According to estimates, the Fed will hike the interest rate six times by 25 points each in 2022 (compared to three hikes three months ago), and a quarter point hike was announced locally along with the Fed's first hike. In 2023, there will be another three hikes.

In addition, the Kuwaiti Central Bank Board of Directors recently set the discount rate at 1.75 percent, and Hermes projected in a recent report that the United Arab Emirates and Saudi Arabia would also increase their interest rates, though Kuwait may not follow suit.

Considering that the dinar is not pegged to the dollar 100 percent, it followed suit (as it did in the last tightening cycle of 2018).

The recent significant increase in interest rates for deposits in comparison with the same period last year will obviously benefit government agencies, and will therefore improve their revenues, but from the banking point of view, it is clear that there are more than one considerations driving the growing competition among banks for deposits in dinars, and it is probable that banks will maintain this competitive pricing in government deposits that will be inflamed throughout the coming year.

In addition to the likelihood that interest rates will increase this year more than once, another factor driving banks' appetite for government deposits is the fact that they need government funds to arrange the Net Fixed Funding Ratios (NSFR). These ratios are related to deposits older than a year. The stability of the dinar can relieve the pressures of arranging maturity ladders, which can lead banks to issue sukuk and increase their capital to adjust their positions.

Obviously, this is a natural phenomenon as a result of the Public Institution for Social Security withdrawing its deposits from local banks and reinvesting them in appropriate investment opportunities, while government deposits declined by about 307 million dinars last February, This compares to 7.477 billion dinars in February 2021, which prompted some banks to adjust their CBK ratios on a long-term basis to accommodate the void that must be filled from other sources, in the calculation of long-term funds..

Some local banks have problems meeting the liquidity ratios required by the Central Bank over the long-term, despite the fact that it is not due to a lack of funds from their perspective, as it is known that all local banks have substantial liquidity surpluses, which allows them to expand their lending business without using the financing market, which is more costly.

Nevertheless, the increasing demand of the banking sector for government deposits also gives an indication of increasing confidence in the possibility of investment expansion in the local market during the coming period. This will be matched by a banker's initiative to expand credit, followed by the need for more funds to regulate the maturity ladder, which will expose interest rates to deposits in order to increase deposit limits, which would raise the cost of borrowing for banks.

Starting in the second quarter of 2022, Kuwaiti banks are forecast to have positive net interest margins, since an increase in interest rates will boost corporate lending, which means that most banks will benefit from current account and savings account deposits, since deposit types (demand deposits) and savings accounts (savings accounts) are not sensitive to an increase in interest rates, which leads to an increase in net interest margins.

The Central Bank of Kuwait reported that, according to its monthly statistics, deposits at the end of February totaled 45.464 billion dinars, an increase of 174 million compared to January (+0.38 percent) and nearly 903 million since the beginning of the year (+2.03 percent). Deposits were up 2.74 percent from 44.251 billion dinars in February last year.

On an annual basis, the total private sector deposits increased by about 1.1 billion dinars (+2.97%) during the first two months of 2022, compared with their level two months earlier. On a monthly basis, their increase was about 361 million dinars (+0.95%) compared with their level in January. Compared to February of last year, when the amount stood at 36.774 billion dinars, it increased by 1.52 billion dinars (+4.13%).

A monthly growth of about 246 million dinars, or 0.69 percent, was achieved by the private sector's deposits in dinars, which reached 35.726 billion dinars in February, and they have increased by 760 millions (+1.17%) since the beginning of the year, while they experienced a growth of about 1.017 billion dinars (+2.93%).  Comparatively to February 2021, when it stood at 34.709 billion dinars.

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