Kuwait banks boosted by likely mortgage law reform

Reuters/Jamal Saidi

• KCB to lose mortgage monopoly
• Boost to banks’ loan growth
• Bank shares soar on hopes

Kuwait bank stocks are hitting highs as traders bet that a long-awaited liberation of  the country’s mortgage laws will come into force and provide a windfall for lenders.

Currently only the government-controlled Kuwait Credit Bank (KCB) provides financing to Kuwaiti citizens and companies for them to buy real estate, and commercial banks are not permitted to offer mortgages.

In 2018, Kuwait’s central bank submitted for government approval a draft law on mortgage financing that would let commercial banks make property loans. Like many proposed state reforms, it has yet to reach the statute books, but the banking industry appears increasingly confident it will come into effect soon.

• Kuwait to let expats buy property to boost market

• Saudi mortgage lending rises despite GDP slowdown

• Dubai mortgage surge as tenants flee rent rises

As a result, shares in National Bank of Kuwait (NBK) were at a nine-month peak this week and have gained nearly 19 percent since late October, while shares in the Islamic lender Kuwait Finance House are up by a similar amount over the same period, climbing to a five-month high last week.

This pair are Kuwait’s two largest banks by assets, and lenders dominate the country’s blue-chip stocks. The Main Market 50 Index is up 8.3 percent this year, outperforming other Gulf bourses.

“The momentum in Kuwaiti banking stocks has partly been driven by optimism around the mortgage law,” said Rahul Bajaj, director of MENA equity research at Citi in Dubai.

Pressure to reform the law on mortgages has come at least in part because KCB’s capital has dwindled, according to a 2021 Gulf Bank report, and it only had the capacity to grant real estate loans for 12,000 new builds annually.

Once the mortgage law is passed, the central bank is likely to take a further six to nine months to decide on the exact rules before banks can start issuing mortgages.

Citi estimates that KCB has a backlog of 90,000 to 120,000 mortgage applications.

Assuming the backlog is about 100,000 and once the change in the mortgage law comes into force allowing commercial banks in Kuwait to offer mortgages, then if these applications are processed over a five-year period, this would provide the Kuwaiti banking industry with 3.5 to 4 percentage points of additional annual loan growth.

The country’s expanding population could add around 2 percentage points to annual loan growth in the form of new mortgage applications, Citi estimates.

Kuwait banks’ combined assets were KWD110.9 billion in 2022, up 24 percent year-on-year, S&P Global’s most recent data shows.

Once the law is in place, banks are likely to be able to provide mortgage loans of up to KWD 140,000 ($455,000), of which the government would pay the interest on the first KWD 70,000, said MR Raghu, CEO of Kuwait’s Marmore Mena Intelligence.

Kuwaiti property prices were stable in 2023, according to Marmore, despite the combined value and volume of residential sales declining both last year and in 2022 as borrowing costs increased because of higher interest rates.

Importantly, the new law will enable banks to foreclose on defaulting borrowers, which is not possible under current legislation, Raghu said. These measures will lower banks’ credit risk and provide them with guaranteed cash inflows, he said.

However, Bajaj said that the Kuwaiti central bank closely controls pricing of retail banking products and uncertainty remains over how such policies will impact mortgage profitability.

“It could go either way," he said. "The regulator could make it a lucrative product for banks, or it could prioritise affordability for borrowers.”

Elsewhere, Saudi Arabia’s banks have enjoyed a home lending boom after the kingdom pushed a mortgage subsidy programme and provided its citizens with incentives and guarantees to become homeowners.

“Given the Saudi experience, the general perception is that the Kuwaiti government will also back a large part of the mortgage,” Bajaj said.

“The mortgage law will be positive in terms of banks’ loan growth, but quantifying profitability is tough, because we don’t know if lenders will have the freedom to price mortgages as they wish or the extent to which pricing will be controlled. It will take some time to resolve these unknowns, even after the law is passed.”