The outlook on Kuwait's banking system remains stable, reflecting a gradual recovery in the banks' profitability and a supportive operating environment, characterised by high government spending, says Moody's Investors Service.

In a new Banking System Outlook, Moody's said over the 12-18 month outlook period, liquidity will remain solid -- underpinned by ready access to deposits of cash-rich government-related corporates/agencies.

Over the outlook period, the government will likely record high fiscal surpluses on the back of high oil revenues, which will sustain its capacity to provide fiscal stimulus to non-oil private-sector economy (domestic banks' operating domain). Moody's estimates that real GDP will increase by around 5.5 percent in 2012, from 5.3 per cent in 2011.

Moody's expects that the banks' reported asset-quality metrics will likely remain close to year-end 2011 levels with NPL levels at around 6 percent.
 
Despite ongoing progress, Moody's believes there are downside risks to the system's asset quality, stemming from high industry and single-party exposures, and a lack of transparency regarding restructured loan levels.

However, the rating agency notes that the sector's strong capitalisation provides the banks with substantial loss-absorption buffers.

Likewise, Moody's expects that Kuwaiti banks' funding and liquidity profiles will remain solid. The system is predominantly deposit-funded and liquidity will remain comfortable. The banks will continue to have access to government and quasi-government deposits, and although such deposits give rise to funding concentrations, these have been stable even during periods of market unrest.

Moody's says that the banks' net profitability will progressively improve, mainly due to declining provisioning charges, but return on equity and return on assets will remain well below the levels of 20 per cent-24 per cent and 2.7 per cent-2.9 per cent, respectively, recorded during the boom years of 2006-07.

Moody's acknowledged that the strengths of the system are counterbalanced by certain credit negative factors including (i) discord between the executive and legislative (parliament) branches of the government that continue to cause delays in the implementation of economic policy; (ii) banks' structurally high depositor concentrations and large single-party and industry credit concentrations; and (iii) corporate governance weaknesses at some banks.  -TradeArabia News Service