Kuwaiti banks reap interest rate benefits even as economy stalls

A weaker aggregate economy has done little to dent the 2023 performance of Kuwait’s banks, which have reaped the benefits of higher interest rates to post strong profitability figures.

Although gross domestic product contracted by 0.7 per cent in 2023 on the back of lower oil prices and production, the sector-wide net profits of nine of the country’s largest domestic lenders increased by 28.7 per cent to Kd1.5bn ($4.9bn), according to data compiled by Kamco Invest.

This was underscored by a jump in net interest income for these institutions, including the National Bank of Kuwait, Kuwait Finance House, Al Ahli Bank of Kuwait, Gulf Bank, Boubyan Bank and Commercial Bank of Kuwait, which grew to Kd2.6bn in 2023, up from Kd2.3bn in 2022, according to Kamco Invest’s head of investment strategy and research Junaid Ansari.

“[The performance] of the Kuwaiti banking sector was no different from what we see elsewhere in the region and around the world. Banks have reported higher net interest income due to steep interest rates aimed at taming inflation,” he says.

Since global monetary conditions started tightening in 2022, the Central Bank of Kuwait has increased its key discount rate by 250 basis points to 4.25 per cent.

This has boosted most Kuwaiti banks’ net interest margins, which, from a sector-wide perspective, increased to 2.78 per cent in the third quarter of 2023 from 2.62 per cent a year earlier, according to Kamco Invest data.

But Ansari notes that Kuwaiti lenders have also been boosted by non-interest income, which “showed significant growth as financial markets closed at an elevated level at the end of last year”.

Aggregate non-interest income for the nine domestic banks jumped to Kd1.21bn in 2023, up from Kd913mn in 2022, according to Ansari.

Strong profitability is backed up by a robust, sector-wide capital adequacy ratio of 19 per cent, according to the IMF, while reserve coverage for stage 3 loans is above 200 per cent, according to data supplied by Fitch.

Robust performance

These results have contributed to a buoyant mood among Kuwaiti bankers, who nevertheless recognise the difficulties posed by a more uncertain domestic operating environment.

“Last year was clearly one of challenges for the banking industry underpinned by local and regional regulatory tightening and pervasive political tension both in Kuwait and across the world,” says Salah Al-Fulaij, chief executive of the National Bank of Kuwait, the country’s largest lender.

“Despite the challenging operational backdrop throughout the year, NBK delivered an outstanding performance, reflected in solid growth and stability,” he says.

NBK’s net profits grew by 10.1 per cent to Kd561mn, up from Kd509.1mn in 2022. Total assets expanded by 3.7 per cent and customer deposits rose by 8.8 per cent.

Meanwhile, Islamic banking giant KFH, the country’s second-largest lender, achieved a record net profit attributable to shareholders of Kd584.5mn, representing an increase of 63.4 per cent from 2022, boosted by the bank’s consolidation with Ahli United Bank Group following its acquisition in 2022.

Other lenders also performed well, with Gulf Bank posting net profits of Kd71.2mn, an increase of 15.2 per cent from its performance in the previous year. Burgan Bank bucked the trend with its net income falling to Kd44mn in 2023 from Kd52mn in 2022. The bank attributed the drop to its Turkish operations’ “hyperinflation-related monetary loss”, and the loss of income from the sale of a regional subsidiary unit.

In spite of the country’s uncertain political and economic backdrop, the country’s banks are well-placed to maintain a stable development trajectory throughout 2024.

“The banking sector is expected to perform well. [The system] is stable and well-capitalised and can absorb economic shocks,” says Ali H. Khalil, chief executive of asset management firm Kuwait Financial Centre, or Markaz.

Redmond Ramsdale, senior director of financial institutions at Fitch Ratings, expects loan growth to remain relatively healthy at between 3 per cent and 4 per cent for the year. And while this remains lower than Gulf Co-operation Council peers such as Saudi Arabia, Kuwait’s outlook remains “steady” he says, with profitability continuing to be buoyed by high interest rates.

“We don’t think interest rate cuts will occur until later in the year. This should help to support Kuwaiti banks’ profitability in 2024,” Ramsdale tells The Banker.

Project pipeline

In the domestic market, larger banks are eyeing opportunities in Kuwait’s project market as the government invests in large infrastructure projects to achieve its long-term development goals.

A 2023 report from KPMG Kuwait identified an estimated $27.6bn worth of projects at the bidding stage. Research from Kamco Invest suggests $8.2bn in projects were awarded in 2023, up from $2.1bn in 2022.

“We recognise the immense potential inherent in financing Kuwait’s development projects. The country’s ambitious vision for infrastructure modernisation and economic diversification presents a compelling opportunity to play a pivotal role in driving growth and prosperity,” says NBK’s Al-Fulaij.

“With a robust pipeline of projects spanning various sectors, there is a pressing need for substantial investment to realise Kuwait’s developmental objectives.”

But analysts caution that the ongoing health of the country’s project market will hinge on political developments in Kuwait and the outlook for Opec+ (the Organisation of the Petroleum Exporting Countries, plus other big oil producers) production cuts.

“[Corporate lending growth] will still be dependent on how projects are rolled out, and the stability of the political environment will drive that. If Opec+ cuts continue, then Kuwait’s revenues will be lower, which will impact the future project pipeline and corporate borrowing demand,” says Chiro Ghosh, vice-president for research at SICO, a regional wholesale bank.

Outside Kuwait, markets across the GCC are also buzzing with infrastructure development and megaproject activity. Kuwaiti lenders with the financial muscle and regional footprint to tap into this growth story are reaping the benefits.

NBK has previously said it is approaching Saudi Arabia “from all fronts”, and the country’s giant project market is no exception.

In December 2023, the lender participated in a four-bank consortium, including Arab National Bank, Saudi Awwal Bank and Riyad Bank, to fund the first phase of “The Avenues Khobar”, a 70,000 sq metre mixed commercial and entertainment zone near the city of Khobar in Saudi Arabia’s Eastern Province.

“NBK is poised to benefit from the expected growth in neighbouring GCC economies, supported by rising government spending and structural reforms,” says Al-Fulaij.

KFH’s success

Meanwhile, KFH’s $11.6bn acquisition of Bahrain-headquartered Ahli United Bank Group, a rare cross-border Middle Eastern acquisition, will also boost the presence of Kuwaiti banks across the broader Mena region.

AUB’s corporate-focused business footprint extended across the GCC, Middle East and north Africa, meaning the deal will enhance KFH’s exposure to the wider region.

The deal was first mooted in 2019 but was delayed until October 2022 due to the onset of the Covid-19 pandemic. Since then, KFH has been actively integrating AUB’s operations into its broader business, including converting key units to be sharia-compliant.

On February 28 2024, KFH announced the completion of its merger with AUB Kuwait, which the lender describes as the “largest-ever banking merger” in Kuwait’s history.

“We have become one bank in Kuwait,” says KFH’s acting group chief executive officer, Abdulwahab lesa Alrushood.

The complex task of converting AUB Bahrain into a sharia-compliant entity was completed on December 10 2023, following the Central Bank of Bahrain’s approval to license it as an Islamic bank.

“This means the bank will offer an integrated range of sharia-compliant products and services, including retail and corporate services, saving and investment products, in addition to trade finance and wealth management solutions,” says Alrushood.

The acquisition of AUB has lifted KFH to become the second-largest Islamic bank in the world by sharia-compliant assets, according to The Banker Database. Its asset base of Kd38bn is second only to Saudi Arabia’s Al Rajhi Bank.

The deal also boosts the Kuwaiti authorities’ ambitions to foster healthy equilibrium between Islamic and conventional banking in the domestic market.

“Islamic banking is a strategically important sector in Kuwait and, as such, this deal balances out conventional and Islamic banking in the country. KFH is now roughly the same size as NBK, so it can represent Islamic banking well from a domestic point of view,” says Ramsdale.

Embracing digital banking

As elsewhere, the imperative for providing digital banking solutions in Kuwait is growing, with data from market research firm Ipsos indicating about 95 per cent of Kuwaitis have used digital channels when engaging with their bank.

Moreover, the country’s demographic trends include a large and growing youth bulge that most lenders are looking to tap into as the service requirements, and tastes, of this age cohort impact the banking market.

“In today’s banking landscape, digitalisation has become indispensable, revolutionising the way financial institutions interact with customers and operate,” says NBK’s Al-Fulaij, who notes that the bank is seeing “skyrocketing” use of its mobile app.

Also growing in popularity is the bank’s “Weyay” digital banking proposition, which launched in 2021. Designed to serve the country’s youth demographic, NBK says Weyay includes a number of unique services to help younger customers track and arrange their expenses.

“Its appeal is spreading rapidly across Kuwait, as more individuals recognise the convenience and accessibility it offers,” says Al-Fulaij.

Despite its position as a large, flagship lender in Kuwait’s banking system, NBK is also engaging with fintechs to further its digital ambitions. According to Al-Fulaij, the bank has dedicated teams exploring “opportunities in personal finance management, wearables and artificial intelligence”.

“We have a culture of innovation across the bank. We are simultaneously investing in talent and innovation to ensure that NBK’s digital transformation moves forward,” he says.

Meanwhile, KFH launched its sharia-compliant digital banking proposition, known as “Tam Digital Bank”, in 2021.

“Tam Digital Bank is designed to appeal to the younger audience, early entrepreneurs and those who are looking for a different and innovative banking experience,” says KFH’s Alrushood.

The lender is also turning to emerging technology to improve its internal processes.

“KFH is leveraging cutting-edge technologies like robotics and AI to streamline back-office operations, utilising big data analytics for informed business decisions. Additionally, private blockchain applications are revolutionising transaction settlements, ensuring efficiency and security,” says Alrushood.

In October 2023, KFH said it was co-operating with digital payment network Ripple to launch an instant cross-border payments service using the firm’s technology.

Taken together, Kuwaiti banks’ digital investments are expected to keep a lid on their cost metrics over the medium to long term, as their contributions to operational and service efficiency accumulate over time.

Junaid Ansari from Kamco Invest says the average cost-to-income ratio for the Kuwaiti banking sector has remained at about 40 per cent in recent times and he does not expect this figure to grow due to the “increasing impact of automation, AI, increasing contactless payments as well as efforts from the banks to lower operating costs by promoting online banking and digital banks”.

Despite the uncertainties stemming from the domestic and regional operating environment, most Kuwaiti bankers expect to see a continuation of their steady growth trajectory in 2024.

“Against the backdrop of political and economic challenges facing Kuwait in 2024, NBK maintains a cautiously optimistic outlook regarding its growth prospects at home. Despite the prevailing challenges, NBK views the domestic market as resilient, with opportunities for growth existing in various segments,” says Al-Fulaij.