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Investors bet on mortgage law change
But analysts say big rally unjustified
Market ‘being over-optimistic’
Shares in Kuwaiti banks are hitting new highs as investors bet on a long-mooted change in the law on mortgages coming into force soon and spurring a boom in property financing.
However, analysts are warning that the sector’s equity rally may prove unjustified, with any earnings windfall unlikely to be as substantial as those enjoyed by banks in neighbouring Saudi Arabia after similar reforms there in 2018.
Kuwait’s central bank submitted for government approval in 2018 a draft law on mortgage financing that would permit commercial banks to offer property loans.
At present, only the government-controlled Kuwait Credit Bank provides financing to citizens and companies to buy real estate.
Like many proposed reforms in Kuwait, however, the draft law has yet to reach the statute books. But the banking industry appears increasingly confident it will come into effect soon.
Shares in National Bank of Kuwait, the country’s largest bank by assets, are up 20 percent so far this year and at an all-time high.
Kuwait Finance House and Burgan Bank, the second and fourth largest lenders by assets, have hit three-year highs.
Banks are the biggest sector in the Kuwait stock market, and the banking rally has helped the country’s bourse become the Gulf’s top performer so far this year.
But Bahrain’s Sico investment bank says in a report that “the massive rally is unjustified” and that it believes the market “is being over-optimistic on the growth potential”.
In its best-case scenario, Kuwaiti bank lending may expand by only 2.5 percent each year for the next four years were the mortgage law to be implemented soon, Sico says.
The impact of permitting mortgages would be far lower than it was for Saudi Arabia, Sico says. It has a “sell” recommendation for shares of National Bank of Kuwait and Kuwait Finance House, and a “neutral” or stay put for Burgan Bank.
Sico’s pessimism, however, does not seem to be stopping investors from seeing what happened in Saudi Arabia and expecting a similar boost to bank earnings in Kuwait.
Before Saudi Arabia approved its mortgage law in 2018, retail loans for property purchases made up about 8 percent of Saudi banks’ total loan book. After the change in the law, mortgages now account for 23 percent of their total lending.
Although there has been no official communication from the Kuwaiti government, “Kuwaiti banks’ management remains optimistic about the approval of the mortgage law,” Sico says.
For now, commercial banks are not permitted to offer mortgages, and instead provide salary-backed personal loans with which to buy property, with lending usually for about 15 years.
Known as installment loans, these represent about one third of Kuwaiti banks’ loan books, Sico estimates, so a higher proportion of loans than mortgages represent in Saudi Arabia.
Interest rates on such borrowings are 7 percent, according to Sico, which is one percentage point higher than what banks would be able to charge were the mortgage law introduced today.
This is because, under the draft law, there is a lending rate cap of two percentage points above the benchmark interest rate, according to Kuwaiti media reports. Today, that rate is 4 percent so a mortgage therefore would in principle be at 6 percent.
MR Raghu, AGBI columnist and CEO of the Kuwaiti consultancy Marmore Mena Intelligence, is more bullish than Sico on the potential impact of a mortgage law on the country’s banks.
“Demand for housing is strong in Kuwait and demand for mortgages is expected to be strong,” he says, pointing to a 100,000-strong waiting list for new homes at the government’s housing authority.
Given the reported expansion in credit portfolios in Kuwait, Raghu says the change in the law “would significantly increase lending growth.”
If the pricing of mortgage loans is lower, “depending on the quantum of mortgage loans as a part of total loans, net interest margin is likely to be slightly lower,” Raghu says of the banks.
Technically therefore, like for like, banks would make less money under the draft mortgage law.
However, “mortgage loans also offer benefits in terms of predictability of cash flows and lower interest rate risk,” he says.
“The longer duration of the mortgage loans would make cash flows more predictable for banks.”
