Dubai: Liquidity in the Kuwait’s banking sector remains comfortable, and there has been some improvement in liquidity conditions in 2016.

“Kuwaiti banks are better placed to weather this period of tightening liquidity than regional peers and although market funding reliance will increase, Kuwaiti banks will remain primarily deposit funded and liquidity buffers will remain comfortable,” said Alexios Philippides, Assistant Vice-President- Analyst at Moody’s.

Customer deposits accounted for 70 per cent of all liabilities as of March 2016, while core liquid assets represented 29 per cent of total assets by end-2015. High deposit concentrations from the government and government-related entities will continue to represent a structural challenge and growth of these deposits will slow in the context of lower oil revenues, leading to higher reliance on more confidence sensitive market funding to support credit growth.

The loan-to-deposit ratio moderated to 82 per cent in May 2016 from 86.1 per cent in November 2015. “Indeed, government deposits in the banking system have risen in 2016 to compensate for the fall in private sector deposits. We believe that the lower private sector deposits could partly be linked to the pull-back in current spending by the government,” said Monica Malik, Chief Economist of ADCB.

Government borrowing (including debt instruments) from the banking sector is low, though expected to rise gradually with the government’s 2 billion Kuwaiti dinars (Dh24.3 billion) domestic borrowing plan to help fund the fiscal deficit.

Net deposits in the banking sector remain higher on a yearly basis. The government is in a strong position to add deposits to shore up liquidity, if needed. The improved liquidity in the banking sector is reflected in the rise in banking sector deposits at the central bank.

Analysts expect net profitability to remain relatively unchanged, with the system’s net income to average assets at just over 1.1 per cent. While net interest and fee income growth will be strong, banks will continue to book elevated provisions (both domestically and abroad) that had consumed roughly 33 per cent of pre-provision income in 2014-15. Margins are expected to remain broadly stable as longer term government issuances to fund the fiscal deficit and higher yields on lending will counter higher cost of funds.

“We forecast non-performing loans [NPLs] of around 3 to 4 per cent of gross loans for 2016-17 [from 3.3 per cent for rated banks at year-end 2015]. NPLs are currently at historically low levels and modest new problem loan formation, in light of the slowdown in the real estate sector and reduced corporate profits, and from overseas exposures can be managed with existing provisions,” said Philippides.

Nevertheless, banks will remain exposed to high credit concentrations and directly and indirectly (through collateral) to volatile equity and real estate markets..