You probably have seen articles mentioning some of the criticisms and recommendations contained in the IMF's recent update of its Financial Sector Stability Assessment for Kuwait.
While I hope to review those in following posts in the not too distant future, I'd like to start by drawing on some of the material to give a macro picture of the Kuwaiti commercial banking sector – both conventional and Shari'ah compliant. This will complement the earlier post on other economic sectors in the country based on Al Joman's analysis.
Let's begin with a look at some macro numbers on the sector. These are taken from Table 5 Page 19. And these are only a few of the statistics there.
Banks' asset composition (Central Bank of Kuwait and IMF estimates). Amounts below are percentages.
| Category | 06 | 07 | 08 | 09 |
| Trade | 11.6 | 10.1 | 9.8 | 8.8 |
| Industry | 4.3 | 5.4 | 6.2 | 5.8 |
| Real Estate & Construction | 28.7 | 30.6 | 31.3 | 32.2 |
| Agriculture & Fishing | 0.2 | 0.1 | 0.1 | 0.1 |
| Investment Companies | 8.8 | 11.7 | 10.9 | 11.1 |
| Oil &Gas | 0.6 | 0.4 | 0.6 | 1.0 |
| Public Services | 0.7 | 0.4 | 0.1 | 0.1 |
| Consumer – Credit Cards | 1.5 | 1.2 | 0.8 | 0.6 |
| Consumer –Auto | 4.0 | 2.6 | 2.2 | 2.0 |
| Consumer – Consumer Loans | 19.9 | 17.0 | 15.2 | 16.4 |
| Consumer – Mortgages | 3.5 | 2.7 | 2.5 | 2.2 |
| Consumer – Equity Purchase Loans | 10.3 | 10.1 | 11.1 | 10.5 |
| Other | 5.8 | 7.6 | 9.2 | 9.1 |
Some observations.
- There is significant exposure to Real Estate/Construction, Investment Companies, and Consumer Loans for Share Purchases. Almost 54%. One might describe these as not primarily productive sectors but derivative sectors feeding off wealth created by other sectors.
- By contrast there is relatively little lending to what are usually considered primary productive sectors: manufacturing, farming and trading sectors. That reflects lending opportunities by and large rather than lender red lining.
- Consumer lending is a significant LOB at 39.2%, 33.6%, 31.8% and 31.8%.
- Lending for share purchases is 10%+. A particularly tricky business to engage in given the volatility in the KSE and lack of proper supervision/regulation.
- Consumer loans are another major segment. In the words of the FSSA "low risks loans since they are guaranteed by salary assignments". This is a mantra you will just about every commercial banker in the Gulf mention. What they don't mention is that at many lenders there are no maximum loan to salary ratios – designed to make sure borrowers have a serviceable debt burden. A reason why the Central Bank of Bahrain established these in a regulation. Or that if a person loses his job (something happening a bit more frequently these days), there is no salary to assign. And what are we to make of agitation in the Majlis Al Umma for the Government to buy up consumer debt, if everything is fine?
Some additional metrics, again percentages.
| Category | 06 | 07 | 08 | 09 |
| NPLs to Total Loans | 3.9 | 3.2 | 5.3 | 9.7 |
| NPLs Net of Provisions to Capital | 14.3 | 11.4 | 26.0 | 45.7 |
| Large Exposure to Tier I Capital | 144.0 | 129.8 | 129.5 | 144.9 |
| ROAA | 3.7 | 3.6 | 0.9 | 0.8 |
| ROAE | 28.8 | 29.4 | 7.7 | 6.8 |
| Equity Exposure to Shareholders' Equity | 53.2 | 56.9 | 67.6 | 68.5 |
More observations.
- I think the trends are what are more important. Clearly, the direction of these ratios is not surprising given knowledge of the difficulties faced by the banking sector over the past few years.
- The second ratio's dramatic increase is due to an almost doubling of NPLs between 2008 and 2009. There was an equally dramatic drop in provision coverage from 124% in 2007 to 89.4% in 2008 and 68.3% in 2009.
- Also note that the last ratio reflects (a) lending for equity purchases and (b) equity taken as collateral for other extensions of credit.
Let's look at the FSSA's comments.
- In its Risk Assessment Matrix, the IMF notes concentrations in exposure to real estate, investment companies and stock prices, commenting that a decline in real estate or stock prices could lead to a major increase in Non Performing Loans ("NPLs").
- It also notes Kuwaiti banks have minimal sovereign risk exposure.
- Reasonably good liquidity with liquid assets at 26% of total assets.
- Banks' assets predominantly domestic – some 80%. And I'd guess international exposure may be primarily with NBK.
- Loan to deposit ratio under 100% at 91% in 2009.
- In terms of assessing a severe realisation of a threat sometimes in the next three years, it assigns a medium risk of occurrence (PD) and medium loss (LGD).
- Banks could broadly withstand IMF's stress tests (outlined in Appendix IV Tables 3, 4 and 5.
Referring to the stress tests there were three: a base case, an intermediate case and a severe case. And the test was for yeat 2010.
- Baseline Case: All 10 banks have Capital Adequacy over 12%. No problems with liquidity.
- Scenario 1(Intermediate): 1 bank has capital less than 8%, 4 between 8% and 12% and 5 over 12%. Of the Top 5 banks, 3 are in 8 to 12% category and 2 above 12%. No liquidity problems. Recapitalization of banks below 12% threshold requires 1% of GDP.
- Scenario 2 (Severe): 1 medium size bank loses all its capital, 4 banks are below 8% but above 0%, 2 banks in the 8% to 12% range, and 3 banks above 12%. Of the Top 5 Banks, 3 are in the 0% to 8% range, 1 in the 8% to 12% range, and 1 bank only exceeds 12%. (Presumably Abu Shukri). No liquidity problems. Recap amount here is 3.8% of GDP.
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