How new foreign ownership rules will affect Kuwait's banks
Lenders will attract foreign inflows and benefit from lower cost of capital
Kuwait’s decision to allow foreign ownership of local banks will woo investments, lower the cost of capital and boost stock market inflows as the country is set to be upgraded to emerging market status by MSCI, analysts said.
The Arabian Gulf country’s ministry of commerce and industry made the announcement on Saturday and attributed the decision to international investor interest in its banking sector. Passive investors, who track indices and do not pick stocks, are expected to ramp up their investment in the Kuwaiti banking sector because of the removal of ownership restrictions, analysts said.
“The move is part of ongoing stock market developments that Boursa Kuwait and the Kuwait's Capital Market Authority have started since 2016 which results in the market being upgraded to emerging markets by FTSE, and place on MSCI’s watch-list for a potential upgrade later this year,” said Mohamad Al Hajj, head of Mena strategy at Egyptian investment bank EFG Hermes. “It helped improve liquidity and attracted $1 billion worth of passive inflows in 2018, with more to come in 2019-20.”
Kuwaiti 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 EFG-Hermes. Average earnings at Kuwaiti banks are forecast to rise 15 per cent, driven by a 6.4 per cent year-on-year increase in loans in 2019, it said in a report last week. Kuwait's banking sector delivered the strongest earnings growth among its Gulf peers, posting a 19 per cent increase in the first nine months of the year.
The lifting of restrictions on foreign ownership “will be beneficial for the banking sector as it will allow access to foreign capital, bring new liquidity and opportunities to strengthen capital positions of the banks,” said Saeeda Jaffar, managing director at professional services firm Alvarez and Marsal Middle East. “New shareholders will provide a different, possibly more developed market view, which will prompt stricter corporate governance practices, accelerating the path for Kuwaiti banks to achieve best international practices in capital and liquidity management.”
The banking sector in Kuwait, Opec’s fifth-largest oil producer as of November, is benefiting from an uptick in government spending thanks to higher oil prices this year compared to last year. The International Monetary Fund is forecasting Kuwait's economic growth to reach 4.1 per cent next year, up from 2.3 per cent this year.
“Kuwait is a defensive market benefiting from a solid and stable macro, lowest budget break-even oil price,” said Mr Al Hajj. “In addition, Kuwaiti banks offer some of the best fundamentals within GCC banks in terms of loan and earnings per share growth. We have seen increased interest in Kuwaiti banks in 2018.”
The two banks that will benefit the most from the lifting of ownership restrictions are the National Bank of Kuwait, the country’s largest lender, and Kuwait Finance House, the biggest Sharia-compliant lender, which is in the midst of merger talks with Bahrain’s Ahli United Bank, he added.
The rosier economic outlook is accompanied by stock market reforms that include the easing of listing rules, delisting companies deemed unsuitable for public investment and segmentation of the market with different disclosure requirements.
“We can expect the new capital and liquidity will enable local banks to generate new business opportunities," said Ms Jaffar. "It should also lead to a lower cost of capital, therefore increasing the ability to do business and invest in growth and development."
Updated: December 16, 2018 05:07 PM