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Kuwaiti banks hunt for growth

15 August 2024

The broader economic backdrop for Kuwaiti lenders is relatively more challenging than for peers in other Gulf states, with the state budget back in deficit territory and oil revenues down 20% in 2023-24.

The Washington-based IMF estimates real economic activity to have fallen by 2.2% in 2023, with the oil sector contracting by 4.3% due to Opec+ production quota cuts.

Even so, Kuwaiti lenders have managed to put in some decent performances, benefitting – like their Gulf peers – from stronger net interest margins (NIMs) that have flowed from the global high interest rates of recent years.

Overall banking sector profits grew at an impressive 28.7% in 2023, according to Kamco Invest Research.

This year, profit performances are unlikely to match such increases. Traditionally the country’s largest bank, National Bank of Kuwait (NBK), for example saw a 6.2% increase in first-half 2024 profits to KD292.4m ($953.6m).

Kuwait Finance House, newly enlarged since its acquisition in February this year of Ahli United Bank (AUB), creating one of the largest Islamic banks globally, reported a 2.3% increase in net income to KD341.2m ($1.12bn) for the same period.

Policy pressure

Higher interest rates have exerted a negative impact on lending in Kuwait; according to the IMF, growth in credit to the non-financial private sector fell in 2023 to only 1.8% as bank lending rates rose in response to gradual policy rate hikes by the Central Bank of Kuwait (CBK), broadly in line with global monetary policy tightening.

However, it added that in light of prudent financial regulation and supervision, banks have maintained strong capital and liquidity buffers, while their profitability has rebounded from pandemic lows, and non-performing loans remain low and well provisioned for.

One challenge facing Kuwaiti lenders is that the domestic market still does not provide sufficient lending opportunities to materially impact their performances. In part, this reflects familiar issues related to Kuwait’s unique political structure.

“Political conflicts involving the parliament and the government delayed the much-needed fiscal and economic reforms, which have put pressure on growth and limit the credit growth potential of the banking sector,” says Gilbert Hobeika, a director at Fitch Ratings.

This has implications for Kuwait’s lenders because if they cannot grow domestically, they will likely look beyond the country’s borders.

Looking beyond Kuwait is designed to create market share and build stronger franchises.

KFH is a case in point. Upon completion of its merger with AUB Kuwait, it is now placed as a rival of NBK in terms of size, giving it the critical mass to enable it to consider expanding into other GCC markets. Market speculation has centred on the potential acquisition of a large stake in Saudi Investment Bank. 

There is also the prospect of another large domestic merger, with Boubyan Bank and Gulf Bank, two Kuwait-listed sharia-compliant lenders, undertaking an initial feasibility study for a potential tie-up. Further consolidation moves could see a conventional lender absorbing an Islamic player or gaining an Islamic subsidiary. All options remain open.

Relative weakness

That focus on inorganic expansion also reflects the weaker profitability seen in Kuwait’s banking sector relative to other GCC banking markets.

There are several reasons for this, says Hobeika. “One is that Kuwait has one of the highest loan loss allowance coverages of stage three loans, meaning that while you could see in the region of 70-120% in the GCC, in Kuwait banks could reach 500% and on average around 250%. This is because the CBK is much more conservative than any other regulator in the region.”

The other point is the pressure on Kuwaiti banks’ NIMs. Different considerations explain why Kuwaiti banks have not benefitted from higher NIMs in the same way as Saudi or UAE banks have.

“The dynamics are really different,” says Hobeika. “One is the pricing cap set by the Central Bank, and then you’ve got the fixed interest rates on retail loans, so they cannot increase their pricing. Then you’ve got a huge amount of murabaha on the Islamic side, which are fixed for long durations.”

In an overbanked economy such as Kuwait, the result is increased competition, with banks bidding to take a piece of a small cake.

That said, the effective supervision of the CBK provides for some additional support for banks.

“They will provide some relief for them to be able to generate efficient operating profit, to support their capital and internal generation of capital. Even if the performance is lower, it’s still sufficient to support internal capital generation,” says Hobeika.

The NIM situation reflects Kuwait’s distinctive policy approach. CBK does not systemically follow the US Federal Reserve’s interest changes, meaning that typically, every two or three changes made by the Fed will be followed by a single change in Kuwait. 

According to an analysis by Kuwait-based research firm Marmore, the approach of skipping interest rate tweaks has meant that while the overall NIM has changed in line with the global policy rate, the magnitude of change has been smaller. For that reason, NIMs might not decline for all Kuwaiti banks in the anticipated forthcoming easing cycle.

Marmore notes that this year, while banks such as NBK expect their NIMs to be stable, other banks have highlighted the difficulty in providing guidance for NIMs given the uncertainty over the timing and magnitude of rate cuts.

And while some Kuwaiti lenders have not gained as much benefit as other Gulf banks from higher interest rates, they may yet feel the positive impact from lower rates, given that retail loans are fixed.

These advantages may seem marginal, but in a global climate where lower interest rates will reduce the capacity to generate easy profits as in past years, they may prove to be welcome for Kuwait’s lenders.

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James Gavin

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    1. Dubai Court of Cassation – Cases No. 109/2022 and No. 403/2020  2. Dubai Court of Cassation – Appeals Nos. 778 and 887 of 2025  3. Abu Dhabi Court of Cassation – Cases Nos. 1115/2024 and No. 166/2024  4. Dubai Court of Cassation – Appeals Nos. 778 and 887 of 2025  5. DIFC Court of Appeal’s decision dated 9 January 2025

    About the author
    Laetitia Rabbat is deputy counsel, ICC International Court of Arbitration, Abu Dhabi

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