The outlook for
The stable outlook reflects Moody's expectation of a favourable domestic operating environment, underpinned by high oil revenues and government spending, which will support banks' recovering profitability, robust capitalisation and ample liquidity.
Over the outlook period, Moody's expects net profitability to recover, as the provisioning burden of legacy problem loans continues to ease and increased cash flows of corporate borrowers will improve asset-quality and loan recoveries. However, high credit concentrations and undisclosed levels of restructured loans will also continue to pose downside risks for the system.
The stable outlook also reflects Moody's expectations of further improvement in Kuwaiti banks' asset-quality metrics. Banks have made considerable progress in rehabilitating their loan books following the 2008-09 crisis, as operating conditions have remained benign over the past three years. We therefore expect system-wide non-performing loans (NPLs) to decline to three per cent of gross loans for the period 2014-15, down from 4.6 per cent at year-end 2013 and a peak of 10.2 per cent in 2009. Nevertheless, banks remain exposed to high credit concentrations and undisclosed levels of restructured loans.
Moody's expects the banking system to maintain its substantial loan-loss absorption capacity, underpinned both by robust capitalisation levels (with a Tier 1 ratio of 16.2 per cent at year-end 2013) and by improving provisioning coverage. Under Moody's scenario analysis, the system holds sufficient buffers to absorb losses under the rating agency's central and adverse stress scenarios.
Over the next 12-18 months, Moody's expects the Kuwaiti banking system to remain primarily deposit funded and supported by comfortable liquidity. Customer deposits accounted for 82 per cent of non-equity funding, while liquid assets represented 32 per cent of total assets by year-end 2013. Although high deposit concentrations from government and government-related entities will continue to represent a structural challenge, in Moody's view, these deposits will remain a stable funding source over the outlook period.
Moody's expects net profitability to gradually recover as the provisioning burden of legacy problem loans continues to diminish, with the system's return on average assets improving to 1.3 per
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