Global Arab Network | Increased economic risk pressuring Kuwait's banking industry

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Increased economic risk pressuring Kuwait's banking industry

Global Arab Network - - Mohamed Tamer

Monday, 21 December 2009 17:09

Standard & Poor's Ratings Services said today that it has revised its Banking Industry Country Risk Assessment (BICRA) of the State of Kuwait (AA-/Stable/A-1+) to Group 5 from Group 4. At the same time, Standard & Poor's confirmed its 15%-30% estimate of the potential level of gross problematic assets (GPAs) expressed as a percentage of domestic private-sector credit over the full course of an economic recession in Kuwait.

The BICRA change reflects Standard & Poor's view that economic risks in Kuwait have increased, owing to the global economic downturn and the impact it has on local banks and their corporate customer bases, especially those banks that are vulnerable to price volatility in the real estate (including commercial properties and offices) and equity markets. The Kuwaiti economy's limited diversification led to rapid growth of banks' credit facilities during the oil boom years, until mid-2008, with a notable concentration in loans to local property companies and investment companies--the latter, owing to their involvement in the real estate and equity markets. Standard & Poor's believes that these exposures represent important vulnerability in the banks' financial profiles. Kuwaiti banks' structurally strong operating performance--partly derived from their protected local franchises and good efficiency, but also boosted, for some, by proprietary account investment gains--and the government's capacity to support the Kuwaiti banking system if needed are all important mitigating factors in its opinion.

Importantly, Standard & Poor's notes that strong ongoing funding support from the Kuwaiti authorities and customer deposits from Kuwait's public sector entities have, at least temporarily, helped alleviate pressure on the availability and cost of funding.

Nevertheless, Standard & Poor's anticipates that the banks will eventually have to reduce current mismatches in their balance sheet, lengthen the maturity of their liabilities, and prepare for a reduction in the availability of government funding. Kuwaiti authorities have also worked on a financial package to stabilize the distressed local investment company sector and contain any spillover effect on the banking system.
However, Standard & Poor's understands that neither the banks nor the investment companies have yet to meaningfully avail themselves of this package.

Standard & Poor's deems the Kuwaiti authorities to be "interventionist" toward the country's banking sector. It considers that there is a high likelihood of extraordinary and timely government support for the systemically important private sector banks if needed--an opinion that is supported by the government's rescue of Gulf Bank (BBB-/Negative/A-3) in October 2008.
In Standard & Poor's view, the government's comfortable net asset position underpins its ability to provide extensive support to the banking sector if needed, without weighing significantly on its available resources. Standard & Poor's therefore maintains the ratings on Kuwaiti banks above their stand-alone credit profiles.

Standard & Poor's GPA estimates in a severe and prolonged recession remain in the 15%-30% range. According to its definition, GPAs include nonperforming loans, restructured loans, and real estate and other collateral repossessed in loan workouts.

BICRAs evaluate the strengths and weaknesses of a country's banking system compared with those of other countries. BICRAs classify countries into 10 groups, ranging from the lowest-risk banking industries (Group 1) to the highest-risk ones (Group 10) from a bank credit perspective. Today's change in its BICRA for Kuwait underpins all bank credit ratings in the country. Although it will not automatically lead to rating changes, it could contribute to a change in the ratings on Kuwaiti banks on a case-by-case basis. Other countries in Group 5 include Bahrain, Brazil, Oman, and Poland.

Global Arab Network

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