Fitch: Public Spending Boost to Kuwaiti Banks

OREANDA-NEWS. Kuwait's exceptional fiscal strength provides insulation from the fall in oil prices and allows the government to press ahead with increasing capital spending. This is a priority that was outlined by the Minister of Finance in a parliamentary session at end-August. This is likely to improve operating conditions for the banks, given that implementation of projects in Kuwait has been slow in the past and because public-sector spending tends to boost credit demand across a wide range of sectors, stimulating private sector growth and consumer spending, says Fitch Ratings.

We forecast Kuwaiti non-oil GDP growth of 4.5% in 2015 and expect banking sector loan growth to be stable at 10% for the year, as in 2014. 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.

Loan books are split between retail at 30% and corporates at 70%. 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. 2016.

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

Kuwaiti banks continue to have strong appetite for retail banking. Consumer indebtedness is a concern for Fitch but borrowers are often public-sector Kuwaiti nationals who enjoy job security and generous benefits. Consumer lending is also tightly regulated, which safeguards the banks. The authorities could limit the growth of public sector wages and headcount in 2016, which may 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.

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. In August, Fitch revised Saudi Arabia's rating Outlook to Negative and revised the Outlook on four major Saudi banks to Negative in September as a result of the sovereign revision.

Also in August, we downgraded five Omani banks to reflect our view that the Omani government's ability to support the banking sector had weakened. In June we downgraded Bahrain's sovereign rating to reflect growing strains on the public finances, which resulted in a downgrade of ratings at two leading Bahraini banks.