Following its review of Kuwaiti banks, Standard & Poor's Ratings Services said yesterday that it has lowered its long-term counterparty credit rating on Gulf Bank to 'BBB+' from 'A-' and affirmed the 'A-2' short-term rating. At the same time, Standard & Poor's affirmed the 'A-/A-2' ratings on Kuwait Finance House (KFH) and Commercial Bank of Kuwait (CBK) and the 'BBB+/A-2' ratings on Al Ahli Bank of Kuwait (ABK) and Burgan Bank. It removed all ratings from CreditWatch with negative implications, where they had been placed on Feb. 16, 2009 (and on Oct. 27, 2008, for Gulf Bank). The outlooks on all these ratings are negative.
The downgrade on Gulf Bank reflects our view that its stand-alone credit profile has deteriorated following large losses in 2008 and material asset quality deterioration. Furthermore, Gulf Bank's combined exposure to Kuwait's real estate and construction sectors, domestic investment companies, and a couple of troubled regional corporate clients will likely pressure the bank's asset quality, profitability, and capitalization.
While KFH, CBK, ABK, and Burgan Bank are also broadly exposed to the same economic sectors in Kuwait, we have affirmed our ratings on these entities, taking into account bank-specific mitigating factors (see Standard & Poor's research reports on each individual bank, to be published on RatingsDirect following the release of this report), as we expect the banks' financial profiles to better weather the deteriorated operating environment at their current rating levels. However, the negative outlooks reflect the fact that we do not rule out that the banks' respective stand-alone credit profiles could deteriorate more than we currently expect because of their material exposure to the real estate and construction sector, and to local investment companies--all of which have entered a correction period.
The Kuwaiti banking sector's total exposure to domestic investment companies stood at about $9.1 billion at May 31, 2009. Individual banks show wide differences in their respective gross exposure, ranging from 40% to 120% of their adjusted total equity (ATE). At the same time, collaterals against these exposures vary from 20% to 60%. Some banks took provisions against these exposures in the last quarter of 2008 and first quarter of 2009, denting their bottom-line results for the period. We anticipate that more provisions will be required in the coming quarters. But predicting the amounts is difficult due to the heterogeneity of the investment companies' business and financial profiles and shareholding structures.
The Kuwaiti real estate market has entered a correction period since summer 2008. Kuwaiti banks' exposure to the real estate and construction sectors is high, stretching from about 1.5x to 3.6x of ATE for these five banks. The level of collateral attached to these exposures appears satisfactory to us.
We classify the State of Kuwait (AA-/Stable/A-1+) as "interventionist" toward its banking sector, meaning that we expect the state would provide strong extraordinary support to systemically important private sector banks if needed. We view Gulf Bank, KFH, CBK, ABK, and Burgan Bank as systemically important banks. Consequently, our long-term ratings on these five banks are one notch above their respective stand-alone credit profiles. The current ratings also incorporate the ongoing support coming from the Kuwaiti authorities. The government, among other measures, has guaranteed customer deposits through a formal legal framework and boosted liquidity through some government-related entities. We understand that Kuwaiti banks have so far had limited recourse to the recently-passed "Stability" law intending to promote lending and protect the banking sector.
The negative outlooks on Gulf Bank, KFH, CBK, ABK, and Burgan Bank reflect our expectation that increased credit risk is likely to weigh negatively on these banks' financial profiles. Under our base-case scenario, we expect the financial profiles of these banks to remain adequate for the current ratings. However, if the operating environment worsens and/or if the financial profiles of these banks--especially asset quality, financial performance, or capitalization--is more adversely affected than we currently expect, the ratings would come under pressure. On the upside, all other things being equal, we could revise the outlooks to stable, on a case by case basis, if operating pressures ease, if supportive measures that the government takes materially improve the stand-alone credit profiles of these banks, or if they demonstrate superior resilience to current market and economic conditions.
