Despite Kuwaiti banks showed an improved performance in 2010 and stable outlook but risks remain there in 2011, according to Fitch Ratings.
In its latest report titled ‘Kuwaiti Banks: Annual Review and Outlook’ stated its outlook for Kuwaiti banks as stable.
The agency expects the operating environment for banks in Kuwait to improve in 2011 and profitability to continue to benefit from declining impairment charges. Although a significant deterioration in asset quality is not expected, Fitch remains cautious on the banks’ large exposures to higher risk sectors such as real estate, investment companies and stock market lending.
Kuwaiti banks’ long- and short-term IDRs are based on Fitch’s expectation of an extremely high probability of sovereign support, if needed. “Potential changes to the outlooks on the IDRs, support ratings, and support rating floors for each of the Kuwaiti banks would largely be dependent on changes in the Outlook of the Kuwaiti sovereign, although Fitch views this as unlikely at present,” it added.
“There may be some scope for an improvement in Individual Ratings in the medium term, if the domestic operating environment continues to progress, and the banks’ performance and risk profiles notably improve.”
“The Kuwaiti economy resumed its positive growth trend in 2010, boosted by surging oil prices and slowing improving credit conditions in global financial markets. Kuwait has one of the strongest balance sheets of any Fitch-rated sovereign, with consistently large current account and fiscal surpluses, very little government debt and the third-highest GDP per capita of all Fitch-rated sovereigns,” Fitch said.
“The announcement in 2010 of a five-year $125 billion Economic Development Plan is expected to drive sweeping efforts to diversify the economy through capital spending, but implementation has been slow to date,” it said.
Fitch would view the full implementation of this plan as a key positive for both the economy and the domestic banking system, but is of the view that actual implementation will undershoot targets in 2011.
“Despite the improving operating environment, key risks within the Kuwaiti banking system remain. The relatively small nature of the Kuwaiti economy, with its limited private sector, translates into high concentrations and undiversified loan portfolios. Large exposures to higher-risk sectors – such as construction, real estate and investment companies – and speculative stock-market lending are a common feature across the banks,” Fitch in its report explained. However, Fitch added, this is mitigated somewhat by improved capitalisation across the sector in 2010.