Preserving Solid Liquidity

Banks are at the heart of Kuwait's financial services sector, and being disciplined and primed for lending are also juicy prospects in the capital markets.

Economist Mark Blyth describes Twitter not as information, but perspiration—vented angst reflecting wildly divergent perspectives. Undeniably, events in the Middle East are sparking speculative commentary on regional destiny. Our brief appraisal of Kuwait’s financial universe relies on a more levelheaded witness, the Central Bank of Kuwait. Its latest financial stability report for 2016 reveals healthy financial buffers conducive to a measured dose of economic reforms, contingent upon sustained momentum.

The Macro…

Without encroaching on the economy chapter, certain macro considerations are germane here. The relative recovery in oil prices in 2017 does point to economic continuity, and yet taking the longer view, government policy aims to sidestep hydrocarbon dependency. Kuwait, nonetheless, is the fifth-largest OPEC producer, and along with Oman, its partner in the Duqm refinery located in the latter nation, is seeking USD5 billion in bank loans. In contrast to certain other GCC nations, Kuwait has been relying on the domestic market to raise funds, enjoying cheap credit in the process.

…and the Vision

Kuwait’s Vision 2035 launched in 2017 aims at transformation into a commercial and financial hub. The vision is frontloaded with private-sector participation and a more tempting foreign investment environment. In late 2017, a Reuters study confirmed that the flush Kuwaiti financial sector was proving its mettle. The study identified Kuwait’s top-10 firms, which were topped by National Bank of Kuwait, followed in second place by Kuwait Finance House, and then respectively in fifth, seventh, and eighth positions by Boubyan Bank, Ahli Bank, and Gulf Bank. Furthermore, this year Kuwait enters the FTSE secondary emerging market category, with the capital market standing to benefit from roughly USD4.4 billion of passive flows.


In 1Q2017, Moody’s maintained a stable outlook for Kuwait’s banking universe for the subsequent 18 months, anticipating sustained infrastructure-fueled economic growth. Local financial institutions are also cushioned by the state’s vast sovereign wealth fund. The domestic financial universe is bank centric, with banks, as of December 2016, accounting for around 85% of total assets. They are followed by the domestic financial system (12%), while investment funds, insurance firms, and exchange companies hold the remainder. Financial inclusion is high by global standards. The World Bank indicates that 86.8% of Kuwaitis aged over 15 hold an account with a formal institution, starkly exceeding the 14% Middle East average.
The local banking sector features five conventional, five sharia-compliant, and one specialized bank. The foreign footprint, too, is substantial, at roughly 22% of the consolidated banking system. As of YE2016, conventional banks held a 60% share of the overall system, while Islamic counterparts recorded 38.4%. EY’s World Islamic Banking Competitiveness Report 2016 highlights the potential for the market share balance to ultimately tip the other way.

Some Numbers

In 1H2017, Kuwait’s banking sector ranked third in the GCC valued at USD206 billion, after the UAE on USD723 billion and Saudi Arabia at USD611 billion. Note that for the period the National Bank of Kuwait ranked third by profits with a print of USD549 million. The sector has high exposure to the stock and property markets, as well as public-sector debt. This Cerberus theoretically spells vulnerability to Kuwait’s sovereign rating as well as sector-specific sentiment. Yet, as of 2Q2017, the banks, conforming to Basel III regulations for capital, liquidity, and leverage, boasted high capitalization of 18.3%, while in terms of profitability ROA was at 1.1%. Non-performing loans had a low ratio of 2.4%, while strong loan-loss provisioning saw coverage in excess of 200%. Liquid reserves declined in September 2017 to 6.6% of total assets. Yet, the IMF has noted that, in recent years, rising public sector deposits have somewhat offset a fall in private sector deposit growth, maintaining high liquidity. The fund applauded the central bank for mitigating systemic risk without curbing credit growth. 3Q2017 data indicates YoY credit growth of 3.1% contrasting with 7.3% for the first half of 2017. September’s rise ostensibly derived from lending for securities trading. Household lending held steady at 7.4% YoY. So-called productive business sector credit, excluding real estate and financial sector lending rose 5.1% YoY in September and 10% YtD 2017.

Capital Markets

The Kuwait Stock Exchange (KSE, now Boursa Kuwait), regulated by the Capital Markets Authority, and now more than a year after demutualization, is also working toward its IPO. CEO Khaled Abdul Razzaq Al-Khaled told TBY that the FTSE upgrade in September from a frontier market to a secondary emerging market confirmed appreciation of housekeeping to pique investor appetite. Short- to medium-term KSE objectives include boosting, “direct foreign investment by 300% through the rich portfolio of massive projects set to be rolled out over the coming years.” Historically, the KSE benchmark SEIDX index peaked at 8,300.51 in May 2013 and troughed at 4,936.51 in January 2016. And while Middle Eastern stock markets were the global laggards of 2017, anticipated government spending, and investor appetite for deflated valuations and upgraded national status seem to suggest a northbound trajectory for 2018. In fact, as of January 8, the index, which opened at 6,505.05, had seen a 52-week range of 5,829.77-7,091.46, a one-year return of 15.79% and YtD return of 1.55%.

What’s in a Name?

Quite a lot where transparency and liquidity are concerned. Notable changes include a rethink of the equities index for clearer stock demarcation. This new market segmentation, based on stricter disclosure and compliance criteria, envisages three segments, namely the Premier Market, Main Market, and Auction Market to attract greater and more diversified sources of liquidity.


The insurance industry, with 2015 GWP of USD1.1 billion, is monitored by the Ministry of Commerce. Sector participants have called for a dedicated insurance authority for what remains one of the region’s smallest insurance markets, with meager penetration rising to 0.9% of GDP in 2015 from 0.5% in 2011.

Branch and Medium

Mandatory third-party motor insurance renders this the biggest business line on 30% of total premiums as of 2014. Next came health on 22% and life on 17%. The latter, as elsewhere in the region remains curbed by welfare state provision and also religious convictions. Indeed, Kuwait’s takaful, or sharia-compliant insurance segment, is among the one of the oldest in the region on a notable 24.5% of GWP in 2014. As the regulatory environment is honed, this number can but rise.

Data is King

Anwar F. Al-Sabej, the CEO of Warba Insurance, told TBY that, “Customer service is key because the Kuwaiti insurance market has ballooned in size to around 34 or 35 (mostly composite) companies.” He notes that the Ministry of Health is keen to privatize health insurance, whereby, “I see this area as being particularly dynamic.” Regarding infrastructure projects, the state tends to self-insure upon project completion. This results in “a peak in insurance levels that will not last beyond the near term.” It seems that fintech is central to tomorrow’s challenging insurance sector. The vast majority of respondents to EY’s 2017 survey, Insurance opportunities in the Middle East, concluded that analytics were essential going forward. Kuwaiti insurers are today exploring customer centricity in response to premium-denting price competition. In conclusion, the banking sector, central to Kuwait’s financial sector, is also central to Kuwait exposure. Inclusion on the MSCI EM watch-list should also up the gear at the local bourse. And meanwhile, seeking elbowroom, the insurance sector will be fine-tuning its data for a precision attack on premiums.