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GDP projected to grow 5.2 pct in 2012

Strong demand continues to support real estate transactions
On the back of the massive increase in spending budgeted by the government annually, we expect Kuwait’s Gross Domestic Product (GDP) to reach 5.2% y-o-y in 2012 lower than 8.2% y-o-y in 2011 but still a healthy growth rate (2007-2011 average: 3.2%). Economic growth will continue to be mainly driven by government expenditure, both directly as well as indirectly, as well as resilient private consumption and fixed investment growth. Besides that, elevated hydrocarbon prices throughout 2012 will enable the Kuwait government to increase social spending, which will in turn have a positive impact on economic growth. We forecast oil price average to reach USD95.7pb in 2012, higher than USD95.1pb in 2011 supported by strong demand from the emerging economies.

The expansion of the emerging economies in recent years has been a major factor contributing to demand for oil and other key commodities. While representing only 42.0% of global economic growth at the start of the last decade, developing and emerging economies are expected to contribute 76.0% of this year’s 3.3% global growth, with the biggest part coming from China and India. In recent years, developing and emerging economies have constituted the sole source of incremental oil demand growth, amounting to a cumulative increase of 15.0 million bpd since 2000. Given its strong economic growth, China alone has doubled its oil consumption over the past 12 years to 9.8 million bpd in 2011. As these divergent trends are expected to continue, non-OECD consumption will exceed that of the OECD within the next few years.

Kuwait Real Estate
Real estate transactions continue to be supported by strong demands for residential and investment properties, but are somewhat being affected by a dawdling commercial real estate sector. The improved confidence and sentiment in the real estate market are supported by regulatory tightening and the government’s spending plans. We take comfort that the Public Institutions for Residential Care developed several ambitious developmental project plans for 2011-2014 in order to meet the increasing demand for housing, projects include:

* Providing consultancy services to a railway project at the cost of KWD2.5bln
* Providing consultancy services to develop Failaka Island at the cost of KWD2.1bln for a period of 27 months
* Introducing a hospital specialising in physical therapy, with a capacity of 500 beds over an investment period of 25 years
* Introducing the first labourer city in south of Jahraa along the sixth ring road on an area of 1,015,000sqm, with a capacity of approximately 20,000 labourers

We note that our local real estate department reported that investment in the sector has breached the KWD1bln mark after a low trading period during the last two quarters, a testament of the sector’s resilience. However we noticed that investors are shifting focus towards investment properties evident from the slight dip in the relative weight of real estate deal from 57% in 4Q11 to 43% in 1Q12. We opine that the shift was predominantly because of the lack of supply/products in the residential segment.

The weightage on investment in private housing (residential) sector has decreased due to lack of new products/supply in the market however 1Q12 average deals rose to reach KWD228.2mln (previous quarter KWD207.1mln) propelled mainly from higher transaction recorded in January 2012. We also applaud the Government for being committed to build more than 70,000 housing until 2015 after the hike in housing applications, a staggering 96,000 applications to be exact.

In the commercial front, 1Q12 volume declined primarily stemmed from the pessimistic outlook of some commercial real estate owners. New commercial space offered for rental also witnessed a decrease in demand, leading to reduce rental rate at circa 7.5%, especially in the capital area namely Qiblah, Sharq and Al-Madinah.

A strong recovery of the real estate sector in Kuwait is anticipated to continue given the latest record transaction volumes in 1Q12. Real estate transactions continue to be supported by strong demands for residential and investment properties, but are somewhat being affected by a sluggish commercial real estate sector.

The improved confidence and sentiment in the real estate market are supported by regulatory tightening and the government’s spending plans. The KWD37.0bln Kuwait Development Plan is expected to stimulate growth in the residential sector, while the Kuwait Investment Authority plans to invest KWD1.0bln in the investment and commercial real estate sectors. Consequently, we opine that the real estate market in Kuwait would remain steadfast for the remaining of 2012.

Kuwait Banking Sector
On the banking sector front, overall loan growth continued to strengthen by 4.1% y-o-y to KWD26.4bln in July 2012, up from 4.4% y-o-y in June 2012, driven by stronger loan growth in selected sub-sectors. July 2012′s loan growth was also the strongest in 27 months, and higher than the 2.9% y-o-y recorded in 1Q12 and 1.1% y-o-y in July 2011.

In the first seven months of 2012, overall loan growth expanded by 3.0%. Should the current loan growth momentum sustains for the rest of the year, 2012 full year loan growth is estimated at 5.2% (2011: 1.6%). The gradual improvement of the operating environment in Kuwait and timely implementation of the Kuwait Development Plan are crucial to the recovery of banking system loan growth in 2012. Domestic banks should benefit in the medium to longer term.

Overall deposit growth expanded by 11.50% y-o-y to KWD32.4bln in July 2012 compared to 13.56% y-o-y in June 2012. Private sector deposits, which accounted for 84.0% of total banking sector deposits, increased by 5.3% y-o-y to KWD27.2bln in July 2012 (June 2012: 10.6% y-o-y to KWD28.1bln). Meanwhile, public sector deposits grew by 61.01% y-o-y to KWD5.2bln in July 2012 (June 2012: 37.50% y-o-y to KWD4.3bln).

Stronger deposit growth vs. loan growth gave rise to the banking system excess liquidity of KWD6.0bln in July 2012 (June 2012: KWD6.1bln). Excess liquidity in July 2012 was higher than KWD5.9bln in 1Q11 and KWD3.8bln in July 2011.

Total assets of the banking sector continued to expand, increasing by 8.84% y-o-y to KWD46.1bln in July 2012. This was up from KWD45.3bln in 1Q12 and KWD42.4bln in July 2011.

On asset quality, Kuwait’s non-performing loans (NPLs) have peaked in 2012 with gradual improvement in asset quality moving forward. However, impairment charges are expected to remain high for some banks in 2012 due to the need to improve low loan loss reserve coverage.

A quick review of 1H12 financial performances of nine Kuwaiti banks showed that operating environment continued to be challenging for Kuwaiti banks in 2012, as the economy recovered gradually in line with improved sentiments. Net profit attributable to shareholders of the nine banks under our pool of selection aggregated at KWD260.3mln in 1H12, a decline of 11.7% y-o-y from KWD294.7mln in 1H11. This was because aggregate provision charged by these banks increased by 20.1% y-o-y to KWD394.3mln in 1H12 from KWD328.4mln in 1H11. The increase in aggregate provision was more than offset the 4.4% y-o-y rise in aggregate net operating income at KWD981.1mln in 1H12 (1H11: KWD939.6mln).

In 1H12, aggregate assets of these nine Kuwaiti banks stood at KWD50.7bln, an increase of 4.4% from KWD48.5bln as at end-2011. The increase in aggregate assets was supported by a 4.1% increase in aggregate financing to KWD32.0bln in 1H12 compared to KWD30.7bln in 1H11. Meanwhile, aggregate deposits increased by 3.6% y-o-y to KWD30.8bln in 1H12 compared to KWD29.7bln in 1H11. Aggregate shareholders’ equity was almost unchanged at KWD6.6bln in 1H12.

Kuwait Islamic Banking
At present there are five full-fledged Islamic banks in Kuwait – Kuwait Finance House (KFH), Kuwait International Bank (KIB), Boubyan Bank, Ahli United Bank (AUB), and Warba Bank (which recently commenced its retail operations in 1Q12). KFH is the largest bank in Kuwait, accounting for 70.4% of Islamic banks’ total assets as at-1H12.

As at end-1H12, Islamic banks’ total assets continued to chart an upward trend, accelerating to 11.0% y-o-y vs. only 8.1% y-o-y at the end-2011. Total assets expanded from KWD19.8bln in 1Q12 to KWD19.9bln as at end-1H12 to account for 43.2% of the total assets of the banking system. Growth was led by AUB (+21.7% y-o-y to KWD2.9bln), Boubyan Bank (+19.4% y-o-y to KWD1.7bln), KFH (+8.5% y-o-y to KWD14.0bln) and KIB (+8.4% y-o-y to KWD1.2bln).

Islamic banking deposits increased by 10.9% y-o-y (2011: 17.9% y-o-y) to KWD13.1bln as at end-1H12.

Growth was led by AUB (+27.0% y-o-y to KWD1.9bln), followed by Boubyan (+19.3% y-o-y to KWD1.3bln), KIB (+17.5% y-o-y to KWD0.8bln) and KFH (+6.4% y-o-y to KWD8.9bln).On the financing front, total Islamic financing extended by 7.7% y-o-y (2011: 6.6% y-o-y) to KWD11.2bln as at end-1H12.

Growth was led by Boubyan (+13.3% y-o-y to KWD1.2bln), followed by AUB (+7.6% y-o-y to KWD1.7bln), KFH (+7.2% y-o-y to KWD7.6bln) and KIB (+4.5% y-o-y to KWD0.7bln). As a result, financing-to-deposit ratios of Islamic banks in Kuwait have decreased considerably from 88.2% as at 1H11 to 85.7% as at 1H12, as deposit growth outpaced that of financing.

In 1H12, overall financing growth expanded by 7.7% y-o-y, decreasing from 41.2% y-o-y growth achieved in 1Q12. 2012 full year financing growth is forecasted at 11.3% (2011: 6.6%). On the funding side, total deposits of the banking sector grew by 10.9% in 1H12 (2011: 18.1%), although this is expected to translate into an annual growth rate of 9.3% for 2012. Thus, the financing-to-deposit ratio dropped to 85.7% (2011: 85.1%). On asset quality, Kuwait’s non-performing financing (NPF) have peaked in 2012 with gradual improvement in asset quality moving forward. However, NPF ratios are expected to remain high for some banks in 2012.

Conclusion
Kuwait’s near-term economic growth prospects remain bright. High oil prices have resulted in massive fiscal surpluses and encouraged a ramping up of current spending, which has in turn spurred growth in domestic consumption. Furthermore, tight supply in the global energy markets is likely to see the Kuwait government keeping crude oil production at or near capacity throughout the year supporting exports growth.

© Arab Times 2012, Sep 22 2012

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