Kuwait’s banking sector will continue to face pressure in terms of profitability and asset quality for the rest of the year, said Markaz.

Kuwait Financial Centre’s recent report gave an indepth insight into the impact of COVID-19 credit demand, deposit growth, and net interest margin for the banking sector, as well as non-performing loans (NPL) and profitibalbity prospects over the coming quarters.

Profitability for 2020 is expected to fall, with net income reducing from KD 1.202 billion in 2019 to KD 592 million in 2020, due to lower operating income consequent to contracting Net Interest Margins and lower non-interest income due to subdued business activity, the report said.

For listed banks, deposit growth is expected to fall to 5.0 percent in 2020, down from 8.1 percent last year.

Credit demand is expected to be moderate at 4.0% on a year-on-year basis in 2020 due to the fall in economic activity and output caused by the restrictions laid by the government.

In addition, NPLs are expected to reach 4.7 percent in 2020, up from 1.8 percent in 2019, said the report.

“Defaults are likely to be more in sectors such as real estate, where the financial leverage of some borrowers may be relatively large. However, Kuwaiti banks have the highest loan loss allowances of all GCC countries, which provides buffers for the banks to absorb higher and unexpected losses.”

Overall, the the pandemic is expected to add considerable strain to Kuwait’s banking sector in 2020 and 2021, Markaz said in the report, titled Kuwait Banking Sector Outlook 2020.

“Lockdown measures and the subsequent plunge in oil prices is expected to reduce economic activity to levels not seen in decades.

“The unique nature of the crisis, where both the supply and demand has been impacted, needs to be effectively addressed by policy measures. A lack of sizeable fiscal stimulus to support the economy and spurt in distressed businesses could increase the burden for the banking sector and the costs in the long-term could be prohibitive,” said Markaz

Demand for financing and credit to sustain businesses, particularly small and medium enterprises (SMEs), amid near-zero revenues, has surged.

Despite the Kuwaiti government extending benefit measures for SMEs in the form of subsidised loans or interest waivers, the onus of loan origination, administration and due diligence checks fall on banks, exacerbating operational risk, the report said.

Positive developments on potential vaccines for Covid-19 would be ‘a game-changer’ Markaz said.

The impact of the pandemic will be felt in other ways such as changes in consumer behaviour, which would then have an impact on the banking sector, such as digitisation of the industry.

“Banks will have to upgrade their systems accordingly to keep up with the advancements in the financial service space and might have to partner with smaller fintech firms in the short term to avail digital services that the new-age banking customer demands,” the report said.

(Reporting by Imogen Lillywhite; editing by Seban Scaria)

(imogen.lillywhite@refinitiv.com)

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