Increased merger and acquisitions bolster Kuwaiti banking sector position

London: The recent increase in Kuwaiti bank mergers and acquisitions (M&A) is credit positive for the sector, particularly as the market is overbanked, Fitch Ratings says.

Banks have been increasingly turning to M&A as a strategic response to the limited organic growth opportunities, to diversify their business models and to strengthen their financial profiles.

Despite Kuwait’s (AA-/Stable) robust fiscal and external balance sheets, the banking sector’s growth potential is impeded by frequent political gridlock and institutional constraints. Delayed reforms, such as the new Public Debt Law, which requires parliamentary ratification to allow government borrowing, and the mortgage law, which would enable banks to provide residential mortgages, further exacerbate these challenges.

Last month, Boubyan Bank, the second-largest Islamic bank and the third-largest bank overall in Kuwait, and Gulf Bank, the fifth-largest bank in Kuwait, announced that they were considering a merger. If completed, the merger would create an Islamic bank with assets of about KWD16 billion (USD53 billion) and about a 15% market share, measured by consolidated assets. Fitch does not expect the transaction to finalise before 2025.

In June, Burgan Bank decided to acquire a 100% stake in Bahrain’s United Gulf Bank. This followed the sale of 52.2% from its 99.7% stake in Burgan Bank Turkiye to Al Rawabi United Holding Company, and its 51.8% stake in Bank of Baghdad to Jordan Kuwait Bank in 2023. Burgan Bank is aiming to free up capital and focus on GCC business. All these banks are part of Kuwait Projects Company (KIPCO) group, a large and diverse Kuwaiti holding company.

In 2023, Gulf Bank and Al Ahli Bank of Kuwait planned a merger that included converting one of the banks to an Islamic bank. However, the deal was cancelled.

In 2022, Kuwait Finance House (KFH) acquired Bahrain-based Ahli United Bank. This increased the bank’s footprint in Bahrain and gave it a presence in Egypt and the UK, as well as a higher market share in Kuwait. KFH also plans to further expand in Saudi Arabia. The expansion beyond Kuwait opened access to broader business and revenue opportunities, compensating for the Kuwaiti market’s limited growth prospects. However, despite this strong appetite for expansion, KFH sold KFH-Bahrain to Al Salam Bank in May 2024 and recently decided to divest from Malaysia.

In 2020, Boubyan Bank acquired a majority stake in the Bank of London and the Middle East to diversify its business model and boost revenue generation.

There are ten banks in the Kuwaiti banking sector, all rated by Fitch. Fitch projects modest credit growth of 3%–4% for the sector in 2024 (2023: 2.3%; 1H24: 3.7%) due to high interest rates (the reference rate for lending is 4.25%), modest real GDP growth (-2.1% in 2024; 2.9% in 2025) and political divisions. However, the banks have adequate capital, good funding and liquidity, and strong risk-management practices, which could support faster credit growth if political and institutional hurdles are overcome.

Kuwaiti banks’ ratings are support-driven, reflecting the strong likelihood of sovereign support in case of need.