2024 Kuwait Banking: Interest Rates and NIM Trend Analysis

Interest rate cuts by central banks are being widely awaited by market participants. As banks determine their lending and borrowing rates factoring in the interest rate changes by the central bank, impact of interest rate changes on net interest margin (NIM), a key banking indicator, is a question in the mind of investors.

Theoretically, when the central bank increases interest rates, banks’ net interest margin is also expected to increase and vice-versa. This is because when policy rate increases, bank loans, many of which are floating rate ones, are repriced more quickly than deposits, thereby increasing NIM. When policy rates decline, banks’ NIM decreases due to high funding costs as repricing of deposits tends to lag that of loans.

An analysis of past few interest rate cycles in Kuwait shows that while overall NIM has changed in line with policy rate, magnitude of change has been smaller than that of change in interest rate. At bank level, the change in NIM has not always been in line with that of the interest rate. For example, in the interest rate easing cycle from 2008 to 2015, banks like Kuwait Finance House have seen an increase in NIM. Similarly, in the tightening cycle from March 2022, banks like Boubyan bank have seen a fall in NIM. This has been due to the influence of other factors such as competitive banking environment, change in funding mix, impact of operations in other countries etc.

Exhibit: Kuwait Policy Rate vs NIM