| Rater may cut 5 Kuwaiti banks |
KUWAIT CITY, Feb 16, (Agencies): Five Kuwaiti banks, including top Islamic lender Kuwait Finance House (KFH), face possible downgrades because of exposure to debts of troubled investment firms, ratings agency Standard & Poor’s said. S&P also cut its outlook for National Bank of Kuwait to negative from stable, the ratings agency said in a statement on Monday, citing a worsening economic environment in which Kuwait’s biggest bank by assets operated. S&P said it put the “A-” long-term counterpart credit rating on KFH and Commercial Bank of Kuwait, which posted losses in the fourth quarter, under creditwatch negative. This means it may downgrade those lenders. It confirmed the “A-2” short-term counterpart credit rating for both lenders and also NBK’s “A+/A-1” long- and short-term credit ratings.
The agency also put the “BBB+/A-2” long- and short-term ratings on Al Ahli Bank of Kuwait and Burgan Bank under creditwatch negative after having already placed “A-/A-2” rating of Gulf Bank under the same grade after Kuwait had to rescue it following losses with derivatives. “The various rating actions reflect our expectation that the exposure of these five banks to the distressed local investment companies sector is likely to materially affect their stand-alone credit profile, in the context of an already weakening operating environment,” S&P said in a statement. Approving and implementing a government rescue plan “would influence the stand-alone credit profile of these banks”, S&P added.
Earlier this month, Kuwait approved a $5.1 billion economic stimulus package including state guarantees on fresh loans to investment firms. Parliament is due to debate it next month. Meanwhile, the National Bank of Kuwait issued a statement as follows:
“Standard & Poor’s Rating Services (S&P) affirmed today the National Bank of Kuwait (NBK) ‘A+/A-1’ long-and short-term counterparty credit ratings. “S&P revised its outlook on NBK reflecting the weakening environment in which the ban operates, which is expected to put pressure on the bank’s asset quality, financial performance, and ultimately on its stand-alone credit profile.
Although NBK has less exposure to problematic Kuwaiti investment companies than its domestic peers, we believe that this could increase pressure on its asset quality and profitability. In addition, oil prices and the domestic stock market have declined dramatically, and the global slowdown has had a negative impact on domestic economic growth (1.4 percent expected in 2009) and credit markets. The long-term rating on NBK, which we consider a government-related entity (GRE), is one notch higher than its stand-alone credit profile to reflect our expectation of extraordinary support from the government (classified as interventionist toward its banking sector) in case of need.
NBK is the largest bank in the State of Kuwait (AA-/Stable/A-1), with total consolidated assets of $41.3 billion at year-end 2008. The bank has a consistent track record of leading domestic market share. It recently undertook a rapid overseas expansion to offset the major challenge of operating in an essentially mono-industrial country that is highly sensitive to oil-price fluctuations. We believe that the bank’s rapid expansion strategy-notably in Turkey and Egypt — carries potential risks, especially at a time of global economic downturn. We understand, however, that NBK has decided to put its expansion strategy on hold.”
Following is the full statement released by S&P on National Bank of Kuwait:
“Standard & Poor’s Ratings Services said it revised its outlook on National Bank of Kuwait S.A.K. (NBK) to negative from stable. At the same time, the ‘A+/A-1’ long- and short-term counterparty credit ratings on the bank were affirmed. “The outlook revision reflects the weakening environment in which NBK operates, which is expected to put pressure on the bank’s asset quality, financial performance, and ultimately on its stand-alone credit profile,” said Standard & Poor’s credit analyst Paul-Henri Pruvost.
Although NBK has less exposure to problematic Kuwaiti investment companies than its domestic peers (see article “Various Kuwaiti Banks Placed On CreditWatch Negative On Large Exposure To Investment Companies,” published today on RatingsDirect), we believe that this could increase pressure on its asset quality and profitability. In addition, oil prices and the domestic stock market have declined dramatically, and the global slowdown has had a negative impact on domestic economic growth (1.4% expected in 2009) and credit markets. The long-term rating on NBK, which we consider a government-related entity (GRE), is one notch higher than its stand-alone credit profile to reflect our expectation of extraordinary support from the government (classified as interventionist toward its banking sector) in case of need.
NBK’s funding profile has weakened over the past two years. The share of core deposits in its funding has steadily reduced, while loan growth has been significant. The loans-to-core (nonbank) customer deposits ratio reached 130% at year-end 2008 (albeit still within the 85% regulatory limit set by the Central Bank of Kuwait, which notably includes interbank deposits).
The bank’s ratio of nonperforming loans (NPLs) remained sound at 2.0% of gross loans at Dec 31, 2008. NBK allocated significant provisions during the fourth quarter of 2008, anticipating some asset quality deterioration, thereby strengthening its NPL coverage by loan loss reserves to a conservative 1.8x. We take comfort from NBK’s adequate underwriting policy and the low-risk profile of its personal loans that account for almost one third of its total loan portfolio. The bank’s financial performance demonstrates a long and consistent track record of strength. Nevertheless, we consider that a repeat of this robust financial performance is unlikely, at least in the near term, as further provisioning may be required and lending remains subdued.
NBK’s capitalization remains high—with ATE at 12.5% of adjusted assets at year-end 2008—and underpins its current financial profile. Capital ratios compare favorably with those of large international and regional banks and are expected to remain a key strength.
“We expect that the bank’s stand-alone credit profile will be pressured by the weakening operating environment,” said Mr Pruvost. The ratings on the bank could be lowered if asset quality and profitability were to deteriorate materially over the coming quarters, or in the event that its funding profile weakens. Further overseas expansion that could increase the bank’s risk profile or weaken its capitalization would also be considered a negative rating factor. We would revise the outlook back to stable if the bank were to demonstrate sufficient profitability and asset quality resilience through the economic downturn and if it is able to improve its funding profile. “
Following is the statement issued by S&P on the other banks:
“Standard & Poor’s Ratings Services said today that it placed its ‘A-’ long-term counterparty credit ratings on Kuwait Finance House and Commercial Bank of Kuwait on CreditWatch with negative implications. At the same time, the ‘A-2’ short-term counterparty credit ratings on these banks were affirmed. Furthermore, Standard & Poor’s placed its ‘BBB+/A-2’ long- and short-term counterparty credit ratings on Al Ahli Bank of Kuwait and Burgan Bank on CreditWatch with negative implications. At the same time, Standard & Poor’s commented on its CreditWatch placement of Kuwait-based Gulf Bank. The ‘A-/A-2’ long- and short-term counterparty credit ratings on Gulf Bank remain on CreditWatch with negative implications, where they had been placed on Oct 27, 2008.
“The various rating actions reflect our expectation that the exposure of these five banks to the distressed local investment companies sector is likely to materially affect their stand-alone credit profile, in the context of an already weakening operating environment,” said Standard & Poor’s credit analyst Emmanuel Volland. We understand that the government is currently reviewing a support package to the investment companies that would have a significant impact if approved and executed, and would influence the stand-alone credit profile of these banks. We believe that a large number of investment companies in Kuwait, largely active in the real estate and stock markets, are facing major liquidity, and perhaps solvency, problems and have started discussions with some of their creditors to restructure their debt obligations.
To resolve the CreditWatch placement, Standard & Poor’s will analyze the individual banks’ detailed exposures to the investment companies (on a gross and net basis) and assess the expected impact on their stand-alone credit profile. “We also need to analyze and assess the impact of the government’s support package and measure the extent to which it mitigates risks. Lastly, additional important factors we will take into account are the extent of the local economy slowdown and its impact on banks’ asset quality and financial performance,” added Mr Volland. We expect to reassess the CreditWatch status in the coming weeks or months following consideration of the above factors. In our opinion, we do not anticipate the ratings on these five banks to be downgraded by more than one or two notches, assuming that significant government support will materialize. “ - Arab Times
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| Posted on:
17/02/2009 |
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