Hermes: 2% Growth Expected in Kuwaiti Banks' Profits in Q3

- External lending supported the strong growth of Kuwaiti credit recorded in the first half

- Consumer loans concentrated among government-employed citizens contributed to asset quality resilience

- Limited impact on net interest income from the slight rise in the cost of international deposits

EFG Hermes expects Kuwaiti banks’ profits to grow by 2 percent year-on-year in the third quarter of 2026, driven by continued relatively strong growth in credit facilities and stable net interest margins quarter-on-quarter. It is likely that profits at the country’s two largest banks, National Bank of Kuwait and Kuwait Finance House, will remain stable compared to the third quarter of 2025.

Conversely, Hermes expects Kuwait Finance House and Kuwait International Bank (KIB) to continue posting the highest profit growth performance, supported by revenue growth and improved risk costs returning to more normal levels.

On a quarterly basis, estimates point to a 10 percent decline in net profits, due to comparisons with the very low risk cost levels recorded by the sector in the second quarter of the year.

Hermes expects loans in the Kuwaiti banking sector to grow by about 9 percent year-on-year during the first nine months of 2026, with a 2 percent increase quarter-on-quarter. It noted that local banks maintained a strong growth pace in the first half, supported by external lending, despite geopolitical challenges and delays in launching some major government projects.

Regarding funding costs, the report predicted that the sector’s net interest margin would remain stable at 249 basis points quarter-on-quarter. It pointed out that the Central Bank of Kuwait kept interest rates unchanged in September, unlike the US Federal Reserve, which raised interest rates by 25 basis points, according to the report.

It added that the cost of international deposits rose slightly due to regional risk premiums, but the impact of this increase on the net interest margin remains limited.

On asset quality, the company expected risk costs to rise quarter-on-quarter compared to the very low levels recorded in the second quarter, during which some banks benefited from loan recoveries.

Hermes ruled out that Kuwaiti banks would face fundamental pressures on asset quality during the second half of 2026, citing their limited exposure to the hospitality and small and medium-sized enterprises (SMEs) sectors, as well as the concentration of consumer loans among citizens employed in the government sector.

On the other hand, Hermes noted that funding costs and seasonal factors will play a key role in determining the results of Gulf banks during the period, amid varying performance expectations across regional markets.

It predicted that profits of covered Gulf banks would grow by a low to medium single-digit percentage year-on-year, with Qatari profits declining by 2 percent, while UAE and Saudi banks would see profit growth of 2 percent and 4 percent, respectively.

Regarding credit, Hermes expects UAE banks to lead the regional markets in growth over nine months, at a rate of 19 percent year-on-year, followed by Kuwaiti banks at 9 percent, Qatari banks at 7 percent, and Saudi banks at 6 percent.

It clarified that the forecasts take into account the possibility of a slight decline in the net interest margin for UAE banks quarter-on-quarter, amid ongoing pressures from rising funding costs. It noted that the impact of the recent interest rate hikes on asset yields will not be fully reflected until the fourth quarter of 2026.

For its part, it was anticipated that liquidity provided by government-linked entities and institutions in Kuwait, alongside a sharp slowdown in domestic loan growth in Qatar, would support the stability of net interest margins for banks in both countries on a quarterly basis. It was also likely that the summer season would lead to a slight decline or stability in fee and commission income across the banking sector compared to the second quarter of the year.

In Qatar, Hermes projected a 2 percent year-on-year decline in total bank profits, driven by higher tax burdens, with an expected narrowing of net interest margins by approximately 5 basis points and a slowdown in revenue growth.

The report noted a slowdown in the underlying growth of Qatari loans, despite some banks, including Qatar Islamic Bank, recording high growth rates in the tens of percent. This was partly attributed to the inclusion of bank acceptances, which are non-interest-bearing instruments, in loan figures earlier in the year, meaning that reported growth rates do not necessarily reflect actual growth in traditional lending.

In the UAE, the company forecast continued strong loan growth of 19 percent year-on-year and 3 percent quarter-on-quarter, against a slight decline in net interest margins due to rising funding costs. It also anticipated an increase in risk costs compared to the second quarter of 2026, resulting from the recovery of certain loans.

In Saudi Arabia, the report projected a 7 percent year-on-year increase in total revenues and a 4 percent rise in profits during the third quarter. On a quarterly basis, profits were expected to decline by approximately 2 percent, due to a slight increase in risk costs.

In Egypt, Hermes forecast a 21 percent year-on-year increase in total bank profits, after excluding the impact of the reversal of exceptional provisions at the Commercial International Bank in the third quarter of 2025. The expected growth was primarily attributed to a 32 percent increase in loans, despite a decline in net interest margins of approximately 52 basis points.