Kuwaiti banks will not feel pinch of low oil prices – Fitch

Kuwaiti banks will remain insulated from the drop in oil prices as the country looks to continue boosting capital spending, ratings agency Fitch has said.

The Gulf state’s “exceptional fiscal strength” will ensure that the government presses ahead with its plan to increase public expenditure – a priority that was outlined by the finance minister in a parliamentary session at end-August.

Despite oil prices now down over 50 per cent compared to June 2014, Fitch forecasts Kuwaiti non-oil gross domestic product growth of 4.5 per cent in 2015.

“This is likely to improve operating conditions for the banks, given that implementation of projects in Kuwait has been slow in the past,” the report said.

Public sector spending tends to boost credit demand across sectors, stimulating private sector growth and consumer spending.

Fitch expects the banking sector loan growth to be stable at 10 per cent in 2015, as in 2014.

Presently, banks’ loan books are split between retail at 30 per cent and corporates at 70 per cent.

“Loan growth in 2014 was driven mainly by strong demand for infrastructure project financing and retail banking and we expect this trend to continue in 2015 and 2016,” the report stated.

Over next year and in the medium term, Fitch expects infrastructure finance and corporate lending to grow at a faster pace as more large projects are rolled out.

“Consumer indebtedness is a concern for Fitch but borrowers are often public-sector Kuwaiti nationals who enjoy job security and generous benefits,” the report said.

Consumer lending is also tightly regulated, which further safeguards the banks.

Authorities may limit the growth of public sector wages and headcount in 2016, which could dampen demand for consumer lending.

“But, in our opinion, any such changes are a long way off. We consider the potential for any significant imminent contraction in consumer spending to be low,” Fitch added.

Currently, Kuwaiti banks focus almost exclusively on the domestic market, although the largest banks, National Bank of Kuwait and Kuwait Finance House both have international banking subsidiaries.

Other banks looking to expand regionally include Al Ahli Bank of Kuwait, which announced plans to acquire a controlling stake in Piraeus Bank Egypt.

“Kuwait’s ability to continue with its spending plans without undermining its sovereign credit profile sets it apart from some neighbouring countries that are also highly dependent on oil revenues,” Fitch stated.

In August, the agency downgraded Saudi Arabia’s overall rating outlook to negative primarily because of lower oil prices.

Earlier this month, Fitch also revised the outlooks on four Saudi lenders including Al Rajhi Bank, National Commercial Bank, Riyad Bank and SAMBA Financial Group to negative from stable.

The agency also downgraded five Omani banks – Bank Muscat, National Bank of Oman, Bank Dhofar, Bank Sohar and Ahli Bank last month over concerns that the Omani government’s ability to support the banking sector had weakened.

In June Fitch also downgraded Bahrain’s sovereign rating to reflect growing strains on public finances, which resulted in a ratings downgrade at National Bank of Bahrain and BBK.