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Fitch: Kuwaiti Banks' Profitability to Remain Pressured by High Impairment Charges

Global Arab Network - - George Haddad

Friday, 27 August 2010 08:09

Fitch: Kuwaiti Banks' Profitability to Remain Pressured by High Impairment Charges

Fitch Ratings says in a new report that most Kuwaiti banks' profitability will remain pressured by high impairment charges this year, as banks build up loan loss reserves due to the sharp deterioration in asset quality seen in 2009.

Although a significant weakening in asset quality is not expected for the remainder of 2010, some banks may continue to see increases in impaired loans due to the lag effect of the weaker economic conditions of 2009 and high exposure to troubled sectors: investment companies, real estate, construction and lending for the purchase of equities. Kuwaiti banks' exposure to these more volatile sectors is high - at over half of banking system loans - and this exposes banks to high market-induced credit risk.

All Kuwaiti banks were profitable in H110, but performance varied widely across the sector. Some banks reported robust profitability and adequate asset quality ratios, whilst others reported continued weak profitability due to high impairment charges and weak asset quality. The financial crisis and economic slowdown in Kuwait have exposed the weakness in some banks' risk management practices and their dependence on high-risk sectors. Risk management and lending practices at these banks need to be significantly improved, although Fitch notes that some banks have taken steps in this regard.

Fitch forecasts real GDP in Kuwait to increase by 4.2% in 2010 and 3.3% in 2011. In common with other GCC states, Kuwait now has a long-term roadmap to diversify the economy and meet development goals. A four-year development plan worth USD100bn approved in February 2010 should boost growth and create more opportunities for the private sector. Fitch believes that this plan, if implemented, has the potential to improve the performance of the banking sector over the medium term.

All Kuwaiti banks' Long- and Short-term Issuer Default Ratings (IDRs) are driven by sovereign support. Downside risk to these ratings could arise from deterioration in the creditworthiness of Kuwait (rated 'AA'/Outlook Stable/'F1+'), although Fitch considers this unlikely at present. In recent months, Fitch has taken a number of rating actions on Kuwaiti banks' Individual Ratings. Although most Individual Ratings are currently at relatively low levels, further downside risk could arise from significantly weaker asset quality, leading to higher impairment charges and eroding capitalisation.

Global Arab Network

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