(MENAFN - Arab Times) Credit facilities extended by Kuwaiti banks have been gaining momentum since the beginning of 2012 compared to marginal growth rates recorded during 2011 and 2010. The loan portfolio of Kuwaiti banks grew at 4.5% during the first 10 months of 2012 to record KWD 26.76 billion (USD 94.7 billion) at the end of October-12 representing around 54% of 2012 forecasted GDP. This growth rate is favourably compared to the 1.1% recorded during the comparable period in 2011.
Despite the low appetite for credit, banks' conservative lending policies, and the restructuring of corporate debt along with delay in implementing a dozen of infrastructure and economic projects, the credit market has witnessed signs of recovery in 2012 that will most likely continue through the next year driven by the easing of political tension in the country along with the gradual restoration of confidence in the private sector. Since the beginning of the year banks have extended additional credit of KWD 1.15 billion (USD 4 billion) with personal facilities contributing to around 80% of this increase followed by the credit to the real estate sector and trade which added around KWD 258 million and KWD 253.5 million, respectively. On the contrary, credit to investment companies dropped KWD 335 million on the back of continuing debt problems faced by the sector.
Driven by the increase in the salaries of the public sector and the strengthening of purchasing power of Kuwaiti nationals, personal facilities have been following a continuous upward trend since February 2011, increasing by 17% to record KWD 9.87 billion at the end of October-12, representing 37% of banks' credit portfolio. During the first 10 months of 2012, personal facilities grew by 10% fuelled by high consumption and robust growth in the retail sector accompanied with the significant increase in public sector salaries.
However, growth in credit facilities for the purchase of securities, which account for 27.5% of personal facilities, remained stagnant during the first 10 months of 2012 at 2.8%. Nonetheless, the share of this credit component remains high as it accounts for around 10% of local banks' loan portfolio at KWD 2.71 billion (USD 9.6 billion). Given, the deterioration in the local and int'l equity markets, the structure of credit facilities with the highest percentage of funds channelled into the equity market, has been exposing banks to credit and default risk by individual investors who are heavily invested in the local and regional bourses.
Following 5 consecutive years of strong growth rates over the period 2004-2008 with a CAGR of 34.5% fuelled by buoyant market and ample liquidity, growth in credit to the purchase of securities slowed down significantly during 2009 to 1% and then followed a downtrend in 2010 and 2011 with a yearly contraction of 4.6% and 2.1%, respectively. This drop came on the back deleveraging amid high market risk and volatility in local and international markets. This made banks shift their lending policy by extending credit to households and the productive economic sectors guaranteed by sustainable cash flows.
Chart 2 depicts the sustainable growth in consumer loans (excl. purchases of securities) since Dec-05 indicating a robust growth amid increase in consumption and purchasing power fuelled by increase in public sector salaries. Consumer loans grew at a 6-year CAGR of 8.4% since 2005 up from KWD 3.9 bn to KWD 6.3 bn in Dec-11. During the first 10 months of the current year, consumer loans grew at 13.4% to KWD 7.15 bn fuelled by the improvement in purchasing power and banks' strategies of mitigating credit risk.
Loans to the real estate and construction sectors, which together amount to KWD 8.71 billion accounting for 32.5% of banks' loan portfolios, gained momentum during the first 10 months of 2012 and advanced by KWD 265 million, a growth of 3.1%; Chart 3 shows that since 2008, growth in the real estate loans has started to lose momentum driven by the slowdown in property market and the depreciation in asset prices.
Following a 3-year CAGR of 40% over the period 2004-2007, growth in loans to the real estate & construction sectors dropped sharply to 17% in 2008 then to 10% in 2009 and remained flat in 2010. Given the slowdown in the real estate market and the challenging business environment faced by real estate companies and contractors, high exposure to this sector by banks indicates that further correction in the real estate market might expose local banks to higher credit risk and weigh down on asset quality.
The most significant repercussion of the financial turmoil was the sudden evaporation of credit to investment companies (ICs) in the last quarter of 2008 that followed easy credit in the per-crisis era when loans to ICs grew at a CAGR of 55% over the period 2004-2007. Since then, credit slowed down to 19% in 2008 and 1.2% in 2009 and then followed a steep downward trend in the years that followed dropping by 16% in 2011. Banks remain cautious in extending additional credit to ICs given the challenging business environment and the deterioration in their financial standing and credit profile; accordingly, credit facilities to ICs fell during the first 10 months of 2012 by 14.1% to KWD 2.04 billion, representing 7.6% of banks' loan portfolios down from a percentage contribution of 12% before the crisis. We believe that banks' non-performing loans of ICs will most likely increase and as a result will continue to pressurize banks' profitability in Q4-12 and 2013 by booking additional provisions. However, liquidation of collaterals held against ICs credit along with debt restructuring remains the optimal options for some banks to avoid additional provision.
Chart 4, which depicts the change in outstanding loans across the major economic sectors during the trailing twelve month (TTM) period ending Oct-12 and Oct-11, reflects a considerable growth in personal loans and credit to real estate sector and financing trade along with shrinking credit to ICs due to the strict lending policies followed by local banks and deleveraging in the financial sector.
During the trailing 12 month period ending Oct-12, credit to the real estate sector grew by KWD 272 mn, while growth in personal facilities showed significant improvement to KWD 1.04 bn fuelled by the increase in consumption and the reassessment of banks strategies that became more retail-focused. On the other hand, credit to ICs fell by KWD 411 mn, indicating the deterioration in operating environment, weak financial standing of some major players along with the restructuring of some highly leveraged firms and the significant losses incurred by the sector originated mainly from drop in the prices of equities and real estate.
Deposits with Kuwaiti Banks
Banks' deposit base (public and private) increased in Oct-12 by KWD 9.4 mn to KWD 32.7 bn driven by low risk appetite in the local market that has been prevailing since 2009. Private sector deposits, which represent 84% of local banks' deposit base, added KWD 46 mn or 0.17% to stand at KWD 27.6 bn. During the first 10 months of 2012, banks' total deposits grew by 7% while private sector deposits were up 3.2%. Growth in private sector deposits has accelerated during 2011 to record 8.8% compared to 2.2% in 2010. This growth was mainly fuelled by the Amiri grant which took place in Feb-11 when private sector deposits increased by KWD 1.22 bn in addition to the volatility in financial markets which resulted in flight to safety.
Kuwait's broad measure of money supply (M2) increased for the third consecutive month in October-12, adding KWD 84 mn or 0.3% to stand at KWD 28.75 bn. During the first 10 months of 2012, M2 grew 3.3% compared to a growth of 6% in the comparable period of 2011. The rise in M2 is mainly attributed to the increase in quasi-money by 3.4% or KWD 728 mn to stand at KWD 21.9 bn.
However, in an analysis of the evolution in money supply and its effect on credit facilities, it is evident that the significant expansion seen in money supply following the year 2008 failed to spur growth in the credit market as banks became more cautious in their lending policies.