Consumer credit drives growth in banking sector

KUWAIT: Kuwait's banking sector remained stable last year despite growth easing from double-digit levels in 2013 and 2014, according to the most recent Financial Stability Report released by the Central Bank of Kuwait (CBK) in July.

Although exposure to the slowing real estate industry could see the sector's non-performing loan (NPL) ratio rise from historic lows recorded last year, the sector as a whole remains stable, liquid and well capitalised, with lending continuing to rise on the back of strong consumer credit growth.

Assets grow apace

Total industry assets rose by 2.6 percent last year, with domestic asset growth hitting 5.7 percent as a result of rising domestic credit. Domestic lending was up 8.5 percent, compared to 6.3 percent in 2014, driven by a 10.6 percent increase in household lending.

Credit growth has continued into this year, with the National Bank of Kuwait (NBK) reporting that private sector credit increased by 7.7 percent y-o-y in April. Consumer credit remained a major growth driver, with instalment and consumer loans rising by KD44 million ($145.3 million) over the month, up 11.5 percent y-o-y.

In its most recent "Kuwait Economic Brief", published in September, NBK reported that credit growth remained relatively steady at 7.2 percent y-o-y in May, with total credit rising by KD31m ($102.4m) during the month. Household lending was again the largest growth driver, adding a net KD80m ($264.2m) month-on-month for an 11.3 percent y-o-y gain, while instalment loans rose by 13.1 percent.

NPL risk in real estate

The sector has maintained stability despite rapid lending growth, with the ratio of NPLs declining to a historic low of 2.4 percent in 2015. The sector's capital adequacy ratio, meanwhile, was a robust 17.5 percent, well above the CBK's stipulated 12.5 percent.

However, the CBK notes that the bulk of household lending - 83.8 percent last year - was for instalment loans used in the repair and purchase of private homes, bringing the sector's exposure to the real estate market to almost half of its total credit portfolio.

Although the CBK characterises the risk profile of instalment loans as "markedly different" than direct lending to the real estate and construction sector, it notes that the state's real estate market slowed dramatically in both the number and sales value of deals last year, after recording positive growth for five consecutive years to 2014.

The residential, investment and commercial segments each contracted sharply, with total industry sales volumes shrinking by 28.7 percent to KD3 billion ($9.9 billion).

"[The] materialisation of an extreme tail event like a sharp correction in the real estate prices, though highly unlikely, could test the resilience of the banking sector, given banks' significant exposure to the real estate market, both in terms of loans and collaterals," the CBK report said.

Although over-exposure to the real estate sector remains a risk, Kuwait's banking sector is expected to maintain a steady growth path through to the end of the year. Expansion is being buoyed by moves to shore up reserves and improve liquidity and solvency - such as Ahli United Bank's August announcement that it would issue at $200m sukuk (Islamic bond) - as well as major infrastructure projects and the development of new revenue streams like SME lending.

Supporting SME lending

Despite strong growth in consumer credit, access to finance remains a challenge for many businesses.  According to the World Bank's "Doing Business 2016" report, Kuwait fell one spot from the previous year to 101st out of 189 countries and slid from 105th to 109th place in the getting credit category, behind Saudi Arabia (79th) and the UAE (97th), but ahead of Qatar (133rd) and Oman (126th), and tied with Bahrain.

Increased lending to the SME segment could help ameliorate the situation, with some players already reporting successful growth in small business lending.

In August Manaf Al-Menaifi, executive manager of business banking at the Kuwait Finance House (KFH), said that the bank's SME lending portfolio had grown by 7 percent during the first half of the year to reach KD300m ($990.6m), with the bank targeting a 5 percent increase in SME borrowers to hit 2400 by December.

There remains significant room for growth in Kuwait's SME sector as it currently contributes just 3 percent to GDP, compared to an average of 50 percent in high-income countries, according to the World Bank. Furthermore, SMEs account for roughly 23 percent of Kuwait's workforce, roughly half of the average in high-income and emerging economies.  -- Oxford Business Group.