Moody's maintains stable outlook on Kuwait's banking system

Moody's Investors Service has maintained its stable outlook for Kuwait's banking system, reflecting the rating agency's view that government-funded projects will drive economic growth, and subsequently business for banks. This will soften the impact of declining consumer spending, as subsidy cuts take hold. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Kuwait over the next 12-18 months.

"A record amount of projects under execution will create corporate lending opportunities for banks. We expect 6%-7% credit growth over the outlook horizon of 12 to 18 months. The risk of project hold-ups going forward has increased, however, with the election of a new parliament in late 2016 in which government opposition groups won a large representation," says Alexios Philippides, an Assistant Vice President at Moody's.

"We also forecast higher problem loan formation, albeit from low levels, and non-performing loans to rise to 3% of gross loans over our outlook horizon from 2.5% for rated banks as of end-2016. However, banks maintain strong buffers against potential losses, in the form of solid capital adequacy and a growing cushion of general provisions, which amounted to around 4% of gross loans as of end-2016," says Philippides.

Moody's report, entitled "Banking System Outlook -- Kuwait: Government Projects and Strong Bank Buffers Anchor Stable Outlook," is available on www.moodys.com. The rating agency's report does not constitute a rating action.

Moody's considers that the banking system will maintain its substantial capacity to absorb unexpected losses, reflected in an aggregate Basel III Tier 1 capital ratio of 15.9% at end-2016, underpinned by a conservative implementation of Basel requirements.

Moody's says net profitability will remain broadly stable, with the system's net income at 1.0%-1.2% of average assets. While net interest and fee income will grow, banks will continue to book high provisions. Margins will start to improve following benchmark rate rises.

Market funding reliance will increase, according to Moody's, as deposit growth will be sluggish due to low oil revenues. Core liquid assets, which represented 28% of total assets at end-2016, will remain ample however.

Moody's also expects that Kuwaiti banks will continue to operate in a very high support environment, as the government stepped in to provide capital in the past and can continue to call on large accumulated financial assets managed by its sovereign wealth fund to do so.