Kuwait banks to post higher earnings in 2019 on robust project spending and higher consumer confidence

Average earnings forecast to rise driven by an increase in loans in 2019, EFG-Hermes says

Skyline of Kuwait City from the Kuwait Towers. In the Global Cypersecurity Index 2018, Kuwait was ranked sixth out of 22 Arab countries and 67th out of 175 countries globally. Andrew Henderson / The NationalShow less

Kuwait banks are expected to post higher annual earnings in 2019 driven by more lending as the government presses ahead with project spending and consumer confidence improves, according to a new report.

Average earnings at Kuwait banks are forecast to rise 15 per cent driven by a 6.4 per cent increase in loans in 2019 year-on-year, Egyptian investment bank EFG-Hermes said in a report on Sunday.

"The story for Kuwait remains compelling in 2019," EFG-Hermes said. "Public investment continues, and we expect double-digit growth in 2019-20, with positive trickle down for corporate activity and private consumption."

Kuwait's banking sector delivered the strongest earnings growth among its Arabian Gulf peers, posting a 19 per cent increase in the first nine months of the year compared to 14 per cent for UAE banks and 10 per cent for Saudi banks, the report said.

The outlook for 2019 is boosted by Kuwait's monetary policy which is expected to continue aiding lending recovery and government capital expenditure that is more insulated to oil price changes than elsewhere in the GCC. Additionally, index provider MSCI will decide in June whether to reclassify its Kuwait index with emerging-market status.

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Kuwaiti banks' loan growth could get an extra boost after the Central Bank of Kuwait raised the limit for consumer loans in November, the report showed.

Banks may also see average margins expand by seven basis points next year, assuming there are two interest rate hikes in the next 12 months, one in December and another in 2019, it said.

The top bank equity picks for 2019 are National Bank of Kuwait (NBK) because it is "well positioned"  to benefit from growth in its core corporate business and the fast-growing Islamic finance segment via its subsidiary Boubyan, according to EFG-Hermes.

The next pick is Gulf Bank as its earnings should benefit from retail loan growth, margin expansion, and loan recoveries.

The third pick is Burgan as its growth outlook has improved after its rights issue and it trades at a 10 per cent discount to 2019 book value.

Both Gulf Bank and Burgan are likely additions to the FTSE Russell Emerging Market index early next year, according to analysts.

Kuwait's non-oil gross domestic product is expected to increase 2.8 per cent in 2018 and 3.2 per cent in 2019 from 2.2 per cent in 2017, according to EFG-Hermes estimates.

The increase in government spending since 2015 and the focus on infrastructure investment is expected to trickle down to the rest of the economy and boost non-oil GDP growth.

Kuwait's fiscal position is also less affected by changes in oil prices, having a low break-even oil price of $47/bl, according to IMF estimates, the lowest in the GCC. EFG-Hermes expects a double-digit increase in public investment in 2019 and 2020 of 10 per cent,  after an increase of 13 per cent in 2018.

The increase in oil prices in 2018 has driven up consumer confidence to four-year highs, job creation has improved and retail loan growth recovered to mid-single digits, the report showed.

"Private consumption should continue to recover because of moderate inflation and government spending," EFG-Hermes said.

Fiscal consolidation measures, whether VAT or further fuel subsidy cuts, are not planned for 2019 or 2020.