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KUWAIT CITY, August 14: Despite political unrest and inflationary pressures, the Kuwaiti banking sector is recovering and the acquisition of Ahli United Bank – Bahrain by Kuwait Finance House (KFH), which was approved at the end of last July, is one of the indications that banks are seeking to expand by all means such as acquisitions, after the recession caused by the Covid-19 crisis, Al-Rai daily reports quoting MEED magazine.
Banks’ net profits – excluding Commercial Banking profits – rose for the second consecutive quarter in 2022, rising about 3.4% on a quarterly basis to $1.7 billion, according to the magazine’s report, noting that profit growth has been broad, as seven out of nine banks posted the highest profits in the last quarter. Junaid Ansari, Head of Investment Strategy and Research at Kamco Invest, said: “The earnings growth reflects an increase in total banking revenue of 2.7% in the quarter to $2.4 billion. Revenue growth was led by an increase in interest and non-interest income.
On the expenditure side, Al-Ansari explained that almost all banks recorded an increase in operating expenditure during the second quarter, with a total growth of 25.2%. However, he said, this was partially offset by one of the largest quarterly decreases in provisions and overall loan loss portfolios which more than halved to $193.7 million over the course of the year. of the second trimester. For their part, rating agencies are largely optimistic about the outlook for the local banking sector, as Moody’s, which gave the Kuwaiti banking system a stable outlook in April this year, expects the non-oil economy to continue. to straighten up. Moody’s believes loan quality will remain healthy as businesses and families return to business as usual after the pandemic.
While Kuwaiti banks’ huge exposure to the property sector poses risks – including what MEED reports earlier this year suggested about the potential for a double-digit decline in property prices in 2022 – ample reservations provisions and solid capital are available. Moody’s estimates that banks will continue to be funded by deposits, primarily through low-cost deposits, as customer deposits accounted for more than two-thirds of all obligations in December 2021, indicating that non-performing loans in Kuwaiti banks were 1.6% in 2021, below its 2020 level of 2.2%, and that the country’s loan repayment deferral programs in 2021 ended without significant impact on the quality of bank loans. However, all Gulf banks – with the exception of Kuwaiti banks – experienced a sharp decline in provisioning levels in the first quarter of this year compared to the previous year, with Kuwait emerging against this trend, but Ansari says that shouldn’t be cause for undue concern.
He added, “We noticed that procurement in the GCC was just a matter of timing and was largely standard across all countries in the region. Reserved provisions of Kuwaiti banks remained stable in the first quarter of 2022, but fell sharply in the second quarter of the year. MEED said there are also concerns that earnings levels of Kuwaiti banks appear to be lower than those of their counterparts in the Gulf Cooperation Council countries, as evidenced by the relatively low rate of return on equity in recent months, attributed to the low loan-to-deposit ratio in Kuwaiti banks at around 75%, compared to the average of almost 80% for Gulf banks.
The MEED pointed out that the relatively high cost-to-income ratio in Kuwait, which stood at around 44.2%, compared to an average of 39.7% for Gulf banks, contributed to the decline in profitability. However, the magazine confirmed that the country’s largest banks by assets posted a strong performance in terms of net profit this year, with the National Bank of Kuwait announcing a 58.6% increase in net profit for the second quarter compared to the same period last year. which was $395.3 million. He pointed out that there are some areas in which Kuwaiti banks show better measures than their counterparts in the Gulf States, such as bad debt management.
“Kuwaiti banks have a cleaner loan portfolio on their books, and non-performing loans are at 1.6% compared to an average of 4% for Gulf banks, and this can be attributed to the conservative approach to lending by the banks in the country”. Additionally, Ansari said local banks’ lending capacity remains strong with strong balance sheets, with total assets of $326.8 billion at the end of the first quarter of 2022.” MEED noted the good reputation of the Central Bank of Kuwait in the strict application of Basel III capital standards, which has helped banks to build strong capital reserves, pointing out that the normal tangible capital of the Kuwaiti banking system amounts to about 13% of weighted assets. . risk end of 2021. According to Moody’s, the solvency of Kuwaiti banks was bolstered by good reserves, which amounted to 270% of non-performing loans in December 2021.
MEED said the recent announcement by KFH of its intention to submit an offer to acquire up to 100% of Al Ahli United through a share swap is an indication of the ambitions of some Kuwaiti banks to accelerate their growth. The agency explained that, according to Fitch, the acquisition of Al Ahli United would make KFH the second largest Islamic bank in the world in terms of assets after Al Rajhi Bank, and would significantly increase KFH’s share of assets in the local market in Kuwait, which will increase from 22% to 28%.
MEED said Kuwaiti banks can look forward to the continued improvement in key financial indicators they will witness in the second quarter, with more hope in 2023. Ansari sees growing competition as the main challenge for banks of the region as well as for Kuwait, especially of digital banks, as this has led to mergers in the sector, and the past few years have seen a number of acquisitions and mergers. The ambition of Kuwaiti banks to expand in the region also opens up another challenge in the form of currency risks, as the recent depreciation of the Egyptian pound and the Turkish lira is a potential warning of problems that may affect banks operating in Egypt and Turkey.