JEDDAH: Kuwait banks have endured stress since the unfolding of the financial crisis in late 2008, Kuwait Financial Center (Markaz) report said recently. The banks have had to grapple with significant exposure to real estate and investment companies, two sectors that contributed to bank's vulnerabilities as they underwent devaluation during the crisis. After growing at an annual clip of 30 percent during the hey days (2004-2007), the sector witnessed a 70 percent plunge in its bottom line thanks to high levels of provisioning primarily due to real estate declines and financial service distress. NPL's skyrocketed to 10.8 percent of loans in 2009 from 2.7 percent in 2007. Loan growth fell nearly to 0 percent in 2010, a far cry from the 45 percent growth in 2007 in line with muted deposit growth and increased risk aversion. All this resulted in significant capital-raising to strengthen the balance sheet and resurrect capital adequacy ratio (CAR). However, after nearly 3 years of crisis and provisioning, the report noted that, the worst-case scenario anticipates a 30 percent decline in both real estate and financial services sectors. The banks were more vulnerable to real estate declines with recap needs ranging between KD200 million and over KD1.5 billion under different value declines. The sector's Tier I CAR stood at 17 percent at the end of 2010, higher than the 16 percent registered in 2009 as several bank's increased capital during the year. The stress test showcased that while the current CARs are safely above the limit, the sector is still vulnerable to declines in asset values in two of the country's most important sectors, Real Estate and Financials, more so in the former rather than the latter. As per the stress test, over half of the country's banks would fall below the 12 percent CAR minimum should real estate and financial services assets decline by 20 percent or more. Under the worst-case scenario (seeing a fall of 30 percent in both real estate and financial services), all but one of Kuwait's banks would fall below the CAR minimum. After averaging about 30 percent annual growth during 2004-2007, 2009 saw that average fall by half with sector earnings growing at 15 percent. Three banks registered losses while the rest all saw declines in their bottom lines. The situation normalized somewhat in 2010 - the sector reported a net profit of KD574 million, 61 percent higher than 2009. Only two banks saw declines in net profit growth. Interest Income has been weakening slightly, seeing two consecutive years of declines, 10 percent and 22 percent, respectively in 2010 and 2009. This, consequently, has fed into net interest income, which was flat in 2010 and declined 4 percent in 2009. Provisions against impairments and loan losses skyrocketed in 2008 to KD787 million, or 3.28 percent of loans. The same declined by 9 percent in 2009 and a further 31 percent in 2010 to KD 492 million or 1.92 percent of loans. The quality of the sector's loan book (excluding Boubyan Bank and Kuwait Finance House due to differing reporting style) has fallen through the period between 2007-2010. The percentage of loans categorized as "High" quality was 60 percent in 2007, dropped to 50 percent in 2009 and is at 52 percent as of the end of 2010. Conversely, the percentage of past due and/or impaired loans increased from 10 percent in 2007 to nearly 20 percent in 2009 before settling at 14 percent in 2010. Past due and/or impaired loans increased 76 percent in 2008 and a further 29 percent in 2009 before declining 27 percent in 2010 to just over KD3 billion. In light of rising NPLs and depreciating asset values, Kuwait banks went through a round of capital increases in 2010. Eight out of nine banks raised capital by an average of 40 percent (100 percent in the highest case and 7 percent in the lowest) in order to boost adequacy ratios and combat asset devaluation. The sector's aggregate capital was up 38 percent, or KD531 million, in 2010 from 2008.
