Outlook for Kuwaiti banks remains negative

The fundamental credit outlook for the Kuwaiti banking system remains negative, although implementation of the government's four-year development plan could stimulate the weakened operating environment of the small and undiversified non-oil private sector, Moody's Investors Service said in its new Banking System Outlook.
The Kuwaiti state remains affluent, but Moody's cautioned that the emirate's economy is undiversified and relies heavily on the performance of its oil sector.
"The state-owned oil industry is cash-rich and does not require external funding, which means that banks' lending activities in recent years have been limited to only a few growth areas, namely personal lending (with around one-third of personal credit used for purchasing securities), real estate and construction, non-bank financial institutions and, to a lesser extent, trade," said Stathis Kyriakides, Moody's lead analyst for Kuwait.
The short- to medium-term performance of Kuwaiti banks will likely remain pressurised by elevated non-performing loans (NPLs). Moody's expects that increased provisioning charges will adversely affect profitability in the 2009 results and that such charges will continue to weigh on the performance of some banks into 2010. The rating agency's negative outlook for domestic banks also reflects the lacklustre performance of the Kuwaiti stock exchange, expectations that the recovery of the real estate market will be slow and the weakened credit standing and rising indebtedness of consumers.
Despite some improvement, banks' risk management practices are in need of further significant enhancement. "Industry and single-party concentrations weigh on Moody's assessment of banks' risk positioning, particularly at second tier banks, but their good capitalisation levels and liquidity support from the government are defences against remaining pressures. Corporate governance is weak, like in other countries in the region, but has improved in recent years," explained Kyriakides.
Nonetheless, parliament's approval on February 2 of a KDW 30 bln (US$ 100 bln) four-year development plan aimed at financing large infrastructure projects could, depending on implementation, potentially boost the country's non-oil private sector economy and support the construction sector, whose fortunes have flagged in recent years. This would bode well for the credit standing of the local construction companies and have a positive effect on the asset quality of Kuwaiti banks, many of which suffered elevated credit charges in 2009 as a result of their large exposures to the sector. However, the efficient implementation of the development plan remains in question given that the country's cumbersome bureaucracy has in previous years prevented authorities from meeting much lower spending targets.