Banks In Kuwait Can Benefit From High Interest Rates

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According to Standard & Poor's (S&P), the global credit ratings agency, Kuwaiti banks will remain profitable throughout the current year. This outlook is underpinned by the banking sector’s favorable positioning to capitalize on the prevailing high-interest rate environment over the long term.

The report noted that the increase in net interest income will be offset to some extent by the movement from interest-bearing deposits to non-interest-bearing deposits and the increase in credit losses. However, financing in the banking sector continues to benefit from a strong domestic deposit base and a net external asset position, and this translates into positive investor sentiment, reports Al-Anba daily.

The agency expects weak lending growth in 2023, as banks' lending records expanded at a 3% annual rate in the first half, which is much lower than the 8% growth in 2022.

According to S&P, higher interest rates will reduce demand from corporate and individual borrowers, resulting in low single-digit loans growth in the banking sector.

According to the agency, the cost of risk will increase and normalize by approximately 60-70 basis points in 2023 and 2024, from 40 basis points in the first half of 2023 and at the end of 2022. While high provision margins could offset the potential increase in non-performing loans, banks will be able to maintain broad stability of non-performing loans.

Gulf banks' credit growth will be affected by rising interest rates, but Saudi and Emirati banks' performance will be more flexible because of lower interest rates. We expect that the rise in interest rates will lead to a decline in credit growth at Kuwaiti banks to about 3% from about 8% in 2022, and a decline in the total lending growth of Saudi banks to about 10% in 2023, from 14% in 2022.

While UAE banks will benefit from continued strong non-oil GDP growth, which will mitigate the negative impact of higher interest rates on credit growth. We expect credit growth at UAE banks to improve to about 7% in 2023, compared to 5% in 2022.

Nonetheless, prolonged high interest rates and a slowdown in the oil economy may pose challenges. Qatari banks, unlike their counterparts in the Gulf countries, will continue to face a sharp decline in credit growth, because the country’s major infrastructure projects, which are the main driver of credit demand through contractors, have been completed before hosting the 2022 FIFA World Cup.

In spite of the slight decline in asset quality measures, S&P believes that the negative impact on bank returns will be limited. High interest rates have led to a sharp rise in borrowing costs. We believe that the resulting slowdown in demand in the real estate rental market will weaken the asset quality metrics of Qatari and Kuwaiti banks.

Additionally, Qatari banks' declining exposure to foreign lending will increase loan losses. However, Qatari banks’ strong exposure to the public sector and high Kuwaiti banks’ provisioning spreads will mitigate the negative effects and limit the increase in non-performing loan ratios.

A strong non-oil GDP growth of 6% is also predicted for the UAE in 2023, according to the agency. This, along with recovery of allocations reserved in the past two years, will lead to lower credit costs at UAE banks in 2023 compared to 2022.

While credit costs in the Gulf region will rise, except for the UAE, we still expect Gulf banks' return on assets to improve in 2023, mainly due to higher margins and lending growth that is still acceptable, albeit more slowly. In some Gulf countries,

The Kingdom of Saudi Arabia's Vision 2030 program has provided an incentive for growth for Saudi banks, which will boost their return on assets compared to their Gulf counterparts. We expect Saudi banks to achieve a return on assets of 2.2% in 2023, compared to the average of their Gulf counterparts of 1.8%.

While higher interest rates will reduce Saudi banks' overall lending growth, projects related to Vision 2030 will maintain credit growth well above the average of Gulf banks in 2023.

Non-performing loans and credit costs are likely to increase due to increased lending to businesses, higher interest rates, and portfolio volatility. However, Saudi banks’ asset quality metrics will remain better than the average of their peers, given their significant exposure to government-backed mortgage lending. We expect the non-performing loan ratio to reach 2.1% and credit costs to reach 60 basis points for Saudi banks in 2023, compared to 3.5% and 90 basis points, respectively, for their Gulf counterparts.

The liquidity conditions will tighten. For Saudi banks, we expect that tightening liquidity conditions will reduce the benefit of higher asset returns, because banks will be forced to pursue more expensive financing options, while deposits will continue to move to interest-earning instruments.

Qatar is also worth mentioning, where banks are gradually reducing their reliance on external financing and replacing some of it with more volatile sources, including interbank deposits of non-residents. Buyers in Kuwait and Qatar will face liquidity pressures in the form of higher financing costs, which could exacerbate risks to real estate demand and prices.

The capitalization of Gulf banks remains a source of strength. GCC banks have always enjoyed comfortable capital margins, and we do not expect that to change. We believe that slowing credit growth and rising profits mean that GCC banks’ capital metrics will remain stable. The Saudi Arabian, UAE, Qatari, and Kuwaiti banking systems recorded a regulatory Tier 1 capital ratio of 15% or more in 2022.


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