The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.

All material subject to strictly enforced copyright laws. © 2022 Euromoney, a part of the Euromoney Institutional Investor PLC.

Kuwait’s banks brace for property crash

Market set to slump, claims new report; financials make up 80% of bourse.

The list of emerging markets that are vulnerable in these uncertain times is a long one. But Kuwait is near the top of it and its banks should be worried.

A new report from BCA Research (which is owned by Euromoney Institutional Investor) argues that Kuwait is far more exposed to market downturns than most other countries, principally because 80% of the Kuwaiti bourse is made up of financials, and those financials are in poor shape. 

In particular, it is concerned about the level of real estate exposure among the banks at a time when that sector is expected to deteriorate badly alongside the broader Kuwait economy. It is a bleak outlook given that Kuwaiti stocks are already down 70% since 2007, and are at a lower level today than in 2009.

So what is the argument for the banks making everything worse? On first glance, the banks look OK. Sector-wide, NPLs stood at just 3% at the end of 2015, and the capital adequacy ratio of 16%; at the biggest bank, NBK, its last disclosed figures (for the end of 2014) showed a CAR of 14.5% and NPLs of just 1.5%. It doesn’t look so bad. 

BCA argues, though, that bank earnings will drop, partly because of slowing exports affecting Kuwaiti liquidity, partly because of a slowdown in bank deposits and credit, but mainly because of where that credit has been deployed. “More ominously, Kuwaiti banks are now highly vulnerable to concentration risk,” BCA’s report says. 

“Growth in local banks’ credit in recent years has hinged on consumer and real estate loans,” which today make up 62% of all bank credit, and are still growing. “Notably, the vast majority of consumer loans are for purchasing private homes. In other words, the bulk of bank loans are now leveraged to the property sector.” The IMF separately estimates that 40% of total bank collateral is tied to real estate.

basel graph

This is not an uncommon picture in the Gulf, but the problem in Kuwait is that the real estate sector has boomed – at an annual pace of 27% between 2009 and 2014 in terms of value – before starting to fall in 2015. “With plunging oil income, the odds are very high that the number and value of property deals will crumble, and property prices will soften much more in the years ahead,” BCA says. Consequently, bank credit will shrink, NPLs surge, and financial stocks sell off, bringing down the overall market. 

But does this stand up? NBK’s net income grew by 11.7% in the first nine months of 2015, while at Kuwait Finance House profits were up 17.3% year-on-year. Boubyan Bank enjoyed a 28% year-on-year increase in the first half of 2015. If the banks are in trouble, they are not yet showing it.


Raghu Mandagolathur

MR Raghu, Markaz

MR Raghu, senior vice-president for research at Markaz in Kuwait, expects the banking sector to grow by 5% to 6% this year. 

“The prices of real estate have held up, so far, amid falling oil prices,” he says. “The credit outlook for the Kuwait banking system is positive and supportive of growth given the ample liquidity in the system,” and a recent spate of contract awards through the non-hydrocarbon Kuwait Development Plan should help.  Moody’s most recent report on Kuwait, issued in October, maintained a stable outlook on the banking system that has been in place since 2011. Steffen Dyck, the author, acknowledges that “there remains above-average risk in financing for construction and real estate activity”, as well as banks’ exposure to equity markets. 

“However, banks maintain comfortable liquidity reserves and a stable deposit base,” he says. He also notes that the central bank is introducing conservative Basel III requirements that are higher than Basel itself requires; those measures come in to place this year.

Region-wide, banks face pressure from the withdrawal of government liquidity as they deal with an era of lower oil prices. Amwal, the fund management group in Qatar, says that across the region government deposits account for between 12% and 40% of total deposits, depending on the country, and much of it is now being withdrawn. 

“We expect loan growth to be lower as governments will cut spending,” says Afa Boran, head of asset management. “Additionally, there could be a liquidity squeeze if governments withdraw their deposits from banks. Interest rates will likely rise, hurting those banks that have a large interest rate mismatch. 

“Even if Kuwait banks have better buffers in place than they once did, the threat is real. As the IMF noted in December: “There is strong empirical evidence of feedback loops between oil price movements, bank balance sheets, and asset prices in the GCC.”


It has found that a 1% decline in oil prices leads to a 0.2 to 0.3 percentage point decline in real credit growth, 0.1 to 0.2 percentage points decline in real deposit growth, and a 0.1 percentage point increase in NPLs, with the three worsening metrics all then feeding in to one another. With oil down more than 70% in 18 months, the potential consequences are clear. Kuwait is no stranger to financial system strain, having seen defaults by two of its largest investment companies in 2008 and the recapitalization and restructuring of Gulf Bank, the third largest in the country. If prolonged low oil prices do bring about a crash in real estate prices, we may be about to see just how much Kuwait’s banking sector has learned from past experience. 

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree