Central Bank of Kuwait: Financial Stability Report 2016

Transcription

1. Financial Stability Report 2016
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5. H . H. Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah The Amir Of The State Of Kuwait 33͵ &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚͮϮϬϭϯ ϮϬϭϲ 
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7. H . H. Sheikh Nawwaf Al-Ahmad Al-Jaber Al-Sabah The Crown Prince Of The State Of Kuwait 55͵ &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚͮϮϬϭϯ ϮϬϭϲ 
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9. H . H. Sheikh Jaber Al-Mubarak Al-Hamad Al-Sabah The Prime Minister Of The State Of Kuwait 77͵ &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚͮϮϬϭϯ ϮϬϭϲ 
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11. FOR THE YEAR 2016 . . Mr. Yousef J. Alobaid Governor Chairman Mr. Khalifa M. Hamada Mr. Khaled J. Al-Shamali Undersecretary Ministry of Finance Undersecretary Ministry of Commerce & Industry Member Member Member Mr. Mohammed Ali Al-Kadi Mr. Nasser Abdullah Alroudan Mr. Osamah Mohammad Al-Nisf Member Member
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13. TABLE OF CONTENTS  ƒ Preface III ƒ Coverage and Data Conventions V ƒ Executive Summary VII ƒ Chapter 1:Banks’ Financial Intermediation Box 1.1: Funding Sustainable Development Goals 1 10 ƒ 17 26 ƒ Chapter 2:Banks’ Risk Assessment  Box 2.1: Ensuring Stability in Turbulent Times   Chapter 3: Profitability, Solvency & Resilience ƒ Chapter 4: Domestic Markets 43 ƒ Chapter 5:Payment and Settlement Systems Box 5.1: Financial Stability amid innovations and reforms 59 64 33  &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚ ͮϮϬϭϱ ϮϬϭϲ 11
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15. PREFACE  Financial stability refers to the resilience of the financial system to unanticipated adverse shocks. A financial system, consisting of institutions, markets and infrastructure, can be viewed as stable if it continues to ensure, even in times of stress, an efficient allocation of financial resources and fulfillment of its key macroeconomic objectives. Given the colossal social and economic costs of any financial crisis, maintaining financial stability is a key objective of central banks and regulatory authorities around the globe. The Central Bank of Kuwait (CBK), being the lead regulator of Kuwait’s bank-centric financial system, devotes considerable resources and attention to ensure a sound and stable financial system in the country. A separate Financial Stability Office (FSO) has been set up with the mandate to regularly examine the developments in the financial sector; the Financial Stability Report (FSR) is a flagship publication of the FSO, evaluating the performance of various components of the financial system and serving as a key surveillance tool for the CBK. We are pleased to release our 5th FSR for the calendar year 2016, an annual publication composed of five chapters covering all three aspects of the financial system: institutions, markets and infrastructure. We dedicate the first three chapters to the coverage of the banking sector, the most significant component of our financial system. Chapter 1 assesses the role and performance of banks, both conventional and Islamic, as financial intermediaries, by highlighting trends in both credit allocation and deposit mobilization. Chapter 2 evaluates the risks faced by the banking system, covering various dimensions of credit, market and liquidity risks. Chapter 3 examines the trends in profitability and solvency of the banking system and its resilience against a variety of major shocks, both endogenous and exogenous under different financial and economic stress scenarios. Chapter 4 explores the key developments in money, foreign exchange, equity and real estate markets, the four key components of our domestic financial market. Finally, chapter 5 examines the performance of retail and largescale payment and settlement systems in the country. Through the publication of our FSR, we intend to promote transparency and encourage informed public discourse on various developments in the financial system. We hope that the analyses contained in our report will help all stakeholders form a better understanding of the key issues and facilitate appropriate policy initiatives to address the upcoming challenges. We pray to Allah the Almighty to grant success to our efforts and endeavors and to enable us to achieve the welfare of our beloved country, under the patronage of His Highness the Amir, Sheikh Sabah Al-Ahmad AlJaber Al-Sabah, His Highness the Crown Prince, Sheikh Nawwaf Al-Ahmad Al-Jaber Al-Sabah, and His Highness the Prime Minister, Sheikh Jaber Al-Mubarak Al-Hamad Al-Sabah, may Allah bestow on them good health and continued success. Dr. Mohammad Y. Al-Hashel Governor, Central Bank of Kuwait &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚ ͮϮϬϭϱ ϮϬϭϲ 13 
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17. COVERAGE AND DATA CONVENTIONS   This Financial Stability Report (FSR) primarily examines the performance of the key components of the financial system for the calendar year 2016 (CY16) using December 31st, 2016 as the cut-off date. All amounts are in Kuwaiti Dinar (KD), unless specified otherwise. Our analysis of the banking system in the first three chapters is based on the consolidated banking system data, including both conventional and Islamic banks within Kuwait and their subsidiaries and branches abroad. Due to some data limitations, we have not covered the performance of 12 foreign banks’ branches in Kuwait (which account for about 4.7% of the consolidated banking system) but we intend to make it part of our analysis in the future. Therefore, readers are cautioned that our consolidated banking system data differs from the Kuwait only data that is available on CBK’s website. The last two chapters of the report cover, respectively, performance of the domestic markets and payment & settlement systems within Kuwait only. 'DWD6RXUFHV Discussion in Chapter 1 to 3, first two sections of Chapter 4 (Money & FX Markets) and Chapter 5 is based on the data from the CBK. The sections on the Kuwait Stock Exchange (KSE) & Real Estate Market in Chapter 4 are based on the data from the KSE and the Ministry of Justice, respectively. &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚ ͮϮϬϭϱ ϮϬϭϲ 15 
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19. EXECUTIVE SUMMARY Notwithstanding the challenging economic environment amid low and volatile oil prices , banking system in Kuwait remained sound and stable during the year under review ((CY Y2016) 6 . Domestic credit posted positive though slower JURZWKEDQNV· nonperforming loan ratio continued its steady decline to reach a historically low level, coverage ratio climbed to a new high, capital adequacy levels stayed robust and net income grew positively, albeit at a marginally slower pace than in 2015. These trends collectively highlight that the banking sector, r at least so far, has weathered the oil rout fairly well. While banks entered the low oil price environment from a position of strength, the positive outcome observed in the last two years can in part be ascribed to higher public spending which helped limit the impact of falling oil prices on domestic economic environment. %DQNV·resilience would have come under pressure had there been a scaling back of public investments or a major correction in real estate prices, the two concerns which thankfully did not materialize. Backed by ample financial buffers, the government commendably ramped up infrastructure spending despite the sharp drop in oil revenues. Moreover, stable employment conditions for Kuwaiti nationals coupled with positive growth in wages broadly supported consumer spending, though consumer confidence remained weak until Q32016 amid hike in fuel prices. Positively, oil price (for Kuwaiti Export Crude-KEC ) have more than doubled from around $19 per barrel in January 2016, in large part due to the OPEC deal in November 2016 to cut production. Though the rebound in oil prices surely offers a breathing space in the near term, only comprehensive fiscal and structural reforms will enable Kuwait wean itself off oil dependence. Thanks to its enormous financial savings and low public debt, Kuwait can afford the reforms to be gradual as long as the measures are sustained. Some measures have already been introduced, like the increase in fuel prices in September 2016. In addition, Ministerial Resolution No. 28 of 2017 has been issued in March 2017 for higher electricity and water tariffs to be applicable on certain dates during 2017, though at a lower level than was envisaged in 2016. Still, further progress needs to be made on all fronts: rationalizing expenditures, reforming subsidies, increasing non-oil revenues, creating incentives for nationals to work in the private sector, and diversifying the economy in general are few of the areas which would continue to require unremitting attention. Without such reforms, economic outlook would remain weak, which in conjunction with protracted lower oil prices can, over time, erode buffers in the banking sector and reduce its resilience. &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚ ͮϮϬϭϱ ϮϬϭϲ 17 
20. %DQNLQJ6\VWHP )LQDQFLDO,QWHUPHGLDWLRQ: Banking system posted visibly slower growth in 2016 Growth in assets and f takes slows as its consolidated assets increased by a modest 1.85%, though growth in domestic credit offassets was relatively healthier at 3.1%. Increase in domestic credit, at 2.9%, was also down much slower compared to 8.5% in 2015, in part due to base effect as well as loan repayments. Lending to the households grew by 5.8%, which made the household sector the top recipient of bank credit second year in a row. On the other hand, bank credit to real estate sector contracted by 3.4% as real estate market softened further. Given that bulk of lending to households (84.9% in 2016) 6 has been in terms of installment loans for repair and purchase of private homes, banks combined exposure to real estate sector was almost half of their total credit portfolio. Yet the ULVNSURILOHRILQVWDOOPHQWORDQVLVPDUNHGO\GLIIHUHQWIURPEDQNV·GLUHFWOHQGLQJWR real estate and construction sector. Moreover, notwithstanding the apparent lack of GLYHUVLILFDWLRQ EDQNV· FUHGLW SRUWIRlio itself has been fairly healthy with nonperforming ratios at record low levels. Banks also increased their investments in government securities amid growing issuance of sovereign debt. On the liability side, JURZWK LQ EDQNV· FRQVROLGDWHG GHSRVLWV VORZHd down further to 2.4%., though domestic deposits grew at a better pace, posting 4.8% increase in 2016. Yet the banking system continued to enjoy a stable funding base as 63.6% of the total deposits were placed in the time deposit category. &UHGLW5LVN Asset quality of the banking system has visibly improved over the last few years, exhibited by a steady decline in both the gross and net non-performing loan ratio (NPLR). The gross NPLR, on a consolidated basis, has further dropped to a historically low level of 2.2% (1.8% on domestic, Kuwait- only basis) as of December 2016, well below 3.8% observed in 2007 before the global financial crisis struck. The impressive progress in bringing down the NPLR in the last few years is particularly evident if the existing NPLR (2.2%) is compared with the double-digit NPLR (11.5%) observed in 2009. Going forward, some NPL formation is not unlikely, though at a slower pace and from a low base, as NPLR in certain segments has already bottomed out. Still, the coverage ratio (available provisions to NPLs) remains robust at 237% ((316%, if viewed on domestic basis), substantially greater than the pre-crisis ratio of 87% observed in 2007. Such positive developments in both NPLR and coverage ratio collectively exhibit the success of the CBK and local EDQNV·HQGHDYRUVLQLPSURYLQJDVVHWTXDOLW\RIWKHEDQNLQJV\VWHP Both the level and ratio of NPLs have dropped to a new low of 2.2% « «with coverage ratio reaching a historically high level of 237% Sectoral analysis of NPLs indicates that the decline in NPLR has been somewhat broad based with some of the key sectors experiencing a contraction in their respective NPLRs. One noticeable exception was the real estate and construction 18  &ŝŶĂŶĐŝĂů^ƚĂďŝůŝƚLJZĞƉŽƌƚ ͮϮϬϭϱ ϮϬϭϲ