Global Arab Network | Standard & Poor's Lowers Commercial Bank of Kuwait on Deterioration of Asset Quality

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Standard & Poor's Lowers Commercial Bank of Kuwait on Deterioration of Asset Quality

Global Arab Network - - Gamal Ragay

Thursday, 08 April 2010 01:14

Standard & Poor's Ratings Services said that it has lowered to 'BBB' from 'A-' its long-term counterparty credit rating on Commercial Bank of Kuwait (CBK) and affirmed its 'A-2' short-term rating. The outlook is stable.

"The rating action reflects our view that CBK's asset quality has materially deteriorated, and is likely to continue its negative trend in the coming quarters, weighing heavily on CBK's bottom line profitability," said Standard & Poor's credit analyst Nicolas Hardy.

In addition, S&P believes that CBK's funding profile weakened in 2009 because of an increased reliance on noncore customer deposits.

In S&P view, CBK appears heavily exposed, directly and indirectly, to the real estate and construction sector, as well as to the performance of the local stock market. It also has material concentration risk, both on the asset and liability sides. Asset quality deterioration is the result of the global economic slowdown, its impact on the Kuwaiti economy, and exposure to corporate groups that have experienced problems in the region. Nonperforming loans (NPLs) stood at 17% of total gross loans as of Dec. 31, 2009, compared with less than 5% one year earlier. In addition, coverage by provisions and collateral weakened rapidly and stood at less than 100%. S&P believes that the negative trend in asset quality is not yet over and is likely to require substantial additional provisions that would have a significant impact on 2010 profitability.

"The stable outlook reflects our view that CBK's capitalization and pre-provisions earning generation capacity will remain at the current level, offering a buffer against the expected continuation of asset quality deterioration," said Mr. .

In addition, ongoing support from shareholders and authorities, through deposits, is likely to remain in place.

S&P could lower the ratings on CBK if the deterioration in asset quality proves more severe than it expects, or if liquidity deteriorates significantly. S&P could raise the ratings if asset quality indicators improve materially and reliance on noncore deposits declines, reflecting a strengthening of CBK's business profile.

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