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- Dubai 05:07 06:22 12:05 15:16 17:42 18:57
Slower deposit mobilisation, a reluctance to lend and concerns over loans quality are expected to make 2009 a "challenging" year for the Kuwait banking system, research released this week has indicated.
Loan quality has deteriorated in 2008 and further erosion is expected, Kuwait-based Global Investment House said.
"The second largest bank by asset size, Kuwait Finance House, exhibited a manifold increase in its non-performing loans while the largest bank by the same criterion, National Bank of Kuwait, has taken very high general provisions, presumably bracing itself for worse to come," the report said.
Global expects Kuwait's nominal GDP to take a hit this year, with no relief anticipated from budgeted capital expenditure by the government.
"More than 55 per cent of the banking sector loans currently stand allocated to the real estate sector, financial institutions and towards retail share financing. With stock markets and the retail segment not showing any quick signs of recovery banks will be overly cautious, if not outright reluctant to lend to these economic sectors. Consumer loans may still witness some growth owing to the fact that demographics are still favourable but this segment will have to deal with supply side issues rather than demand side ones," Global said. Deposit mobilisation will be a challenge especially with Central Bank of Kuwait (CBK) rates having decreased from 6.75 per cent in 2007 to 3.75 per cent in 2008, it said.
"We do expect a healthy and slow deposits growth in 2009 which could accelerate if government intervention is approved," it said.
Slow asset growth
Assets of the Kuwaiti banking sector witnessed their slowest growth last year since 2004 but Global views this as a normalisation after two years of "extraordinary movement". The total assets of Kuwait's banking sector stood at KD39.2 billion (Dh493bn) at the end of 2008, a growth of 10.4 per cent on 2007 as against a massive 31.7 per cent growth in 2007 over 2006.
"Signifying the slowest asset growth since 2004 [1.8 per cent on-year], the growth rate confirms the normalisation in asset growth of the banking system after a two-year period of extraordinary movement spanning 2006 and 2007," Global said.
Assets in 2008 were driven almost single-handedly by claims on the private sector, specifically by credit disbursement to residents along with some contribution from foreign assets. Foreign assets grew by almost KD1.2bn during 2008, driven by a substantial increase in deposits with foreign banks and in foreign investments, which grew 13 per cent on-year and 25 per cent on-year respectively in 2008.
The increase in foreign assets was however, completely offset by the cumulative decline of over KD1.0bn in deposits placed with CBK and by the decline in outstanding CBK bonds.
Local interbank deposits also fell by a significant KD710m over 2007 with most of the decline coming in the 2008 H2.
The average monthly growth of total assets in 2008 stood at 1.0 per cent, much lower than the 2.3 per cent in 2007 and 1.9 per cent in 2006. "This is a result of the CBK's earlier stance on curtailing inflation through limiting asset growth in banks," Global said.
Similarly, credit to residents, which forms approximately 60 per cent of the total assets (up from 57 per cent in 2007) exhibited a healthy but lower on-year growth of 17.5 per cent in 2008 compared to 34.9 per cent during 2007.
Average monthly growth of credit to residents for the full year 2008 stood at a low 1.6 per cent as against the average monthly growth of 2.5 per cent portrayed by the banking sector in 2007.
While the decrease in deposits placed with CBK started from the beginning of the year, acceleration in the decrease was noted in the second half of 2008. This coincides with the timing of the liquidity crunch which banks underwent in 2008 H2, prompting banks to scramble for cash from available sources, within the regulatory framework.
As a result, interbank deposits which stood at KD1,390m at the end of 2007, were reduced to KD679m by the end of 2008.
"Shrinkage in interbank lending also supports the notion depicting severe liquidity shortage in the banking system. Interestingly enough, figures for the past three to four years reveal interbank lending has either increased or remained unchanged in the last quarter of the year, which is very unlike the pattern showed by interbank lending figures for Q4 2008, which decreased during the same period," Global said.
Offtake continues
Banking sector loans increased 17.5 per cent on-year, standing at KD23.7bn in December 2008. "This rise, though still robust, is the lowest since 2004 and seems relatively muted when compared to the 35 per cent growth witnessed by banks in 2007. "What needs to be understood, however, is the fact that 2006 and 2007 were exceptional years with extraordinary growth and that going beyond these years, anything above early double digits may still be deemed as a potent attempt at growth," Global said.
"Moreover, viewing the growth in absolute figures… we realise that the increase in loans since the beginning of the decade was second only to the rise in 2007.
This further justifies our belief that 2008 was a very good year in terms of loans growth."
The contribution of different economic sectors in total loans has remained relatively unchanged in 2008. Personal loans still hold the lion's share of total credit disbursed, standing at 33 per cent in 2008, down two per cent from 2007.
Installment loans, which form over 56 per cent of personal loans and 19 per cent of total loans, grew a healthy 14.4 per cent. The personal loans segment contributed the highest (22.1 per cent) in the incremental loans during the year. Real estate loans contributed 21.7 per cent of the incremental loans by growing 15.3 per cent.
"It is worthy to note that the contribution of the non-banking financial companies was lower than in 2007, despite the fact that investment companies, [which form a major portion of this segment] were immensely credit hungry in 2008, more so in the last quarter. Limited credit off-take in this segment may therefore be attributed to the reluctance of the banks to lend to investment companies in the wake of serious risks associated with them in a free-falling market," Global said.
"Immense growth was witnessed in the shares financing segment in September 2008, despite the fact that stock markets had been declining since July with a huge 10 per cent on-month decline in September. On the other hand, the decline in the stock market could have been the actual reason that might have triggered the increase in demand for financing against shares."
Figures for shares financing jumped 29.6 per cent on-year to KD2.8bn at the end of 2008, in line with a four-year growth trajectory.
Stabilising liabilities growth
The total liabilities of the banking sector were reported at KD34.8bn at the end of 2008. "Although the growth of 12.1 per cent seems dampened compared to growth of 30.4 per cent in 2007, we believe that growth has only been tamed to sustainable levels, which is natural after a high-growth period and is very much in line with its 10-year compounded annual growth rate (CAGR) of 11.8 per cent."
Liabilities have been driven mainly by deposits, both private and government, unlike 2007 when total liabilities were driven chiefly by foreign liabilities. The share of private sector deposits in total incremental liabilities increased from 43 per cent in 2007 to 77 per cent in 2008, thereby increasing the share of private sector deposits from 59 per cent in 2007 to 61 per cent in 2008.
"As has been the case previously, the rise in private sector deposits is attributable primarily to fixed deposits. Interestingly so, government deposits and foreign liabilities have stood out in 2008 due to the extraordinary changes witnessed within these liability heads," Global said.
Government deposits, whose share in total liabilities stood at an average of four per cent in the past 14 years, jumped to 10.2 per cent by the end of 2008. Government deposits therefore turned out to be the second highest contributors to incremental liabilities.
Private deposits grew 15.8 per cent to stand at KD21.2bn and government deposits grew a substantial 80.4 per cent to KD3.5bn at the end of 2008. On the other hand, the share of foreign liabilities in total liabilities jumped from a 1994-2006 average of 10.3 per cent to a massive 20.1 per cent in 2007. At the end of 2008, foreign liabilities contributed 16.4 per cent to total liabilities, declining by 8.7 per cent on-year.
Deposits on a roll
Deposits, reported at KD24.8bn at the end of 2008, increased 22 per cent and outpaced the growth in loans and advances. The rise was in line with the growth in the past two years and substantially higher than the 15-year CAGR.
"While total deposits have been driven monumentally by the private sector historically, in the year 2008 factors behind deposit growth stand out because of the substantial contribution of government deposits in deposit mobilisation. With a contribution of 35 per cent in total incremental deposits in 2008, figures reveal contribution from the government sector has never been this high since 2000."
In absolute terms, the KD1.6bn (80 per cent on-year) increase in government deposits in 2008 has been the highest rise in government deposits in the past 15 years.
"The magnitude of this rise can be gauged by the fact the increase in government deposits in 2008 alone stands at more than the cumulative deposit increases in the 2001-2007 period. Interestingly enough, the overwhelming increase in government deposits came in the last quarter of the year and could be taken as an attempt by the government to stabilise the monetary/financial system amidst tight liquidity issues and a sheer crisis of confidence," Global said.
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