Four Kuwait banks reviewed for possible rating downgrade

International ratings agency Moody’s Investors Service has placed on review for possible downgrade the long-term deposit rating and bank financial strength rating (BFSR) of four Kuwaiti banks due to their exposure to property sector. The banks are National Bank of Kuwait at Aa2/B-, Commercial Bank of Kuwait at Aa3/C, Al Ahli Bank at A1/C- and Bank of Kuwait and the Middle East at A1/C-. Moody’s said the key factors prompting concerns about the health of Kuwaiti banks are their exposures to real estate (particularly commercial property) and lending for purchasing securities. In addition to evidence indicating that demand in the Kuwaiti real estate market weakened during the first ten months of 2008, the steep decline of the local stock market between September and November 2008 could weigh further on real estate demand and has also caused significant problems for Kuwaiti investment companies and tensions in the local financial market. Moody’s also cautioned that a stock-market-related loss of wealth by Kuwaiti households and corporates alike could result in rising delinquencies on bank loans extended for securities purchasing purposes, although all banks report that this has not been the case and that loans remain adequately collateralised by a combination of stocks and real estate. Moody’s says the situation is further complicated by new central bank instructions which reportedly limit bank’s flexibility to sell securities held as collateral. On the one hand, Moody’s acknowledged the central bank’s reported action may have restrained an even steeper decline in stock market prices. However, such action could potentially hinder banks’ capacity to exit their positions in the event of growing customer delinquencies. « Moody’s is also concerned that the recently announced support mechanism for Kuwait’s investment companies, which among others calls on the country’s banks to extend long-term secured funding to such companies, could have a material impact on the composition of banks’ balance sheets and divert resources to activities that do not contribute to their franchise evolution, » said Stathis Kyriakides, lead analyst at Moody’s for Kuwaiti banks. Finally, recent events have highlighted the long-identified need for institutional reform in Kuwait (particularly with regard to the operations of the Kuwait Stock Exchange), while political unrest culminating in the recent resignation of the government is unlikely to contribute to the restoration of calm in the financial markets. Moody’s has put National Bank of Kuwait’s B BFSR, (which maps to a baseline credit assessment (BCA) of A1), Aa2 long-term global local currency deposit rating and Aa2 long-term foreign currency deposit rating on review for possible downgrade. The bank’s short-term local and foreign currency ratings as well as the rating assigned to its commercial paper programme were affirmed at Prime-1. Commercial Bank of Kuwait’s C BFSR, Aa3 long-term global local currency deposit rating and Aa3 long-term foreign currency deposit rating were all placed on review for possible downgrade. The bank’s short-term and foreign currency deposit ratings were affirmed at Prime-1. Al Ahli Bank’s BFSR, A1 long-term global local currency deposit rating and A1 long-term foreign currency deposit rating were all placed on review for possible downgrade. The bank’s short-term and foreign currency deposit ratings were affirmed at Prime-1. Bank of Kuwait and the Middle East’s BFSR, A1 long-term global local currency deposit rating and A1 long-term foreign currency deposit rating were all placed on review for possible downgrade. The bank’s short-term and foreign currency deposit ratings were affirmed at Prime-1. Moody’s upgraded National Bank of Kuwait’s long-term local- and foreign-currency deposit ratings to Aa2 from Aa3 on July 26, 2007. Last year, Commercial Bank of Kuwait’s BFSR was changed to C form C-, the bank was assigned Aa3/P-1 GLC deposit ratings and its foreign currency deposit ratings were unchanged at Aa3/P-1. Al Ahli Bank’s BFSR was changed to C- from D+ and the bank’s global local currency and foreign currency deposit ratings were unchanged at A1/P-1. Bank of Kuwait and the Middle East’s BFSR was changed to C- from D+, the bank was assigned A1/P-1 global local currency deposit ratings and its foreign currency deposit ratings were unchanged at A1-P1. At the end of September 2008, National Bank of Kuwait had total assets of KWD12.4bn (Dh169bn); Commercial Bank of Kuwait had total assets of KWD4.3bn; Al Ahli Bank had assets of KWD3bn; Bank of Kuwait and the Middle East had assets of KWD2.2bn. business24-7.ae