* Kuwaiti banks leaving financial crisis overhang behind
* Large amount of debt settlements reached in third quarter
* CBK's business growing 5-10 percent annually
* Strategy through 2016 to focus on local expansion
* Hasn't started steps to convert into Islamic bank
By Ahmed Hagagy
DUBAI, Oct 20 (Reuters) - Commercial Bank of Kuwait (CBK) , the Gulf state's fifth-largest lender by assets, has reached a string of debt settlements with clients that have helped to slash its non-performing loans, the bank's acting chief executive said.
Kuwaiti investment companies were hit hard by the global financial crisis in 2008-2009 and many were forced to enter debt restructuring talks. This has pressured Kuwait's banking sector over the last several years.
CBK's success in reaching debt settlements with such firms suggests the banking sector is now leaving that problem behind.
"We have achieved a good number of settlements over the last two years. We will continue on the same path. There really was a huge effort made over the last two years from 2012 to today," Ilham Yousri Mahfouz said in an interview for the Reuters Middle East Investment Summit.
"However, the third quarter (of 2014) was the key test for settlements. They were much larger than we had expected," she added without giving a monetary figure.
Earlier this year, CBK announced that it had reached a 28 million dinar ($97 million) settlement with Bayan Investment Co and a 17 million dinar deal with Safat Investments.
CBK has now reduced its non-performing loans to 1.3 percent of its total loan book from a 2009 level of 25 percent, Mahfouz said. The bank's provisions for bad loans grew to 480 million dinars at the end of the second quarter this year.
While balance sheets at Kuwaiti banks have improved, banks still face a sluggish economic environment compared to other wealthy Gulf economies, partly because of bureaucratic red tape and delays in the government's infrastructure building programmes.
The International Monetary Fund estimates Kuwait's economy shrank 0.2 percent in 2013, even as other Gulf Arab oil exporters were growing strongly.
Mahfouz said her bank's business was growing 5-10 percent annually.
"The bank is currently experiencing growth, albeit at moderate levels. I will not say 20 or 30 percent. This does not exist for many reasons...The domestic market does not aid in achieving this significant growth."
But the bank's strategy through 2016 focuses on local expansion and there are currently no plans to expand internationally, Mahfouz said.
CBK is now aiming for long-term financing of one year or more as this allows greater stability, Mahfouz added. Last week the bank announced plans for a 120 million dinar bond sale that would boost its capital reserves, with the transaction set to close around the end of this month.
The bank has said it aims eventually to convert itself into an Islamic bank, but Mahfouz said in the interview that CBK had not yet started taking steps in that direction and the conversion would in any case require central bank approval.
However, there is strong interest in doing this among big shareholders and steps may be taken in 2015, Mahfouz said.
"There is no plan so far. However, there is a strong desire from majority shareholders to convert. We may start in 2015 to take the necessary steps, but this year I can say no."
Plunging global oil prices over the past few months have threatened to cut Kuwait's big surpluses from oil exports. However, Mahfouz echoed many other executives in the Gulf by saying she did not expect key building projects in Gulf states, esepcially Kuwait, the United Arab Emirates and Saudi Arabia, to be affected as they had sufficient liquidity. These countries have built up huge fiscal reserves over recent years. (Writing by Azza Al Arabi; Editing by Andrew Torchia)