Moody's places Burgan Bank on review; direction uncertain

This action follows the bank's announcement that it has agreed to purchase four commercial banking subsidiaries and associates of the Bahrain-based United Gulf Bank ("UGB", rated Baa3/Prime-3/D+).

Specifically, Burgan Bank will be acquiring UGB's stakes in Algeria Gulf Bank (60%), Bank of Baghdad (45%), Jordan Kuwait Bank (44%) and Tunis International Bank (77%). The transaction is pending regulatory approvals in Bahrain, Kuwait and other relevant markets and is expected to be completed in the third quarter of 2008. Burgan Bank and UGB are both majority-owned by the KIPCO Group (Kuwait), which holds stakes of around 52% and 88% respectively.

Upon the conclusion of the transaction, Burgan Bank aims to have controlling stakes in the aforementioned banks, upping its stakes as needed (Burgan reportedly already holds just under 6% of Jordan Kuwaiti Bank). Moody's says that this move appears to be in line with the bank's strategy of evolving into KIPCO's regional universal bank. Moody's notes that the new acquisitions could potentially lead to earnings and franchise diversification and enhancement over the medium to long term, provided the subsidiaries underwent further development.

Upon the completion of the transaction, just over a quarter of the expanded group's consolidated assets will be booked outside Kuwait (rated Aa2) in countries exhibiting higher operating environment risks, namely Jordan (Ba3), Tunisia (Baa2), Iraq (Not Rated), Algeria (Not Rated). Initially, Burgan Bank is also likely to face both operational and, possibly more importantly, risk management integration challenges.

Burgan bank has also announced that it plans to finance the acquisition entirely through the issuance of 200 million new shares, enabling it to raise just over $725m - equivalent to the purchase price. At year-end 2007, Burgan's (Basel II) Tier 1 capital adequacy stood at a healthy 16.3%. Moody's expects capitalisation to remain comfortable following the planned acquisition (noting that the size of goodwill booked will affect ultimate capital levels).

During the review period, Moody's will focus on (i) the scale of the immediate impact (if any) on Burgan's asset quality and overall risk profile following the acquisition; (ii) the bank's strategy and timetable in addressing integration challenges; and (iii) the effect on revenue streams (both in terms of diversification enhancement and impact on volatility).

Moody's notes that, the acquisition only has a low probability of negatively impacting Burgan Bank's (currently very good) asset quality to the extent of exerting negative ratings pressure. Jordan Kuwait Bank, the largest of the four banks to be acquired (accounting for three quarters of new assets), reports very low non-performing loan ratios, although the rapid credit growth seen in recent years may entail some elevated credit risks. Moody's also believes that there is a low probability of negative ratings pressure as a result of greater demands on management and specialised personnel to address integration and risk management issues.

Nevertheless, Burgan has exhibited a willingness and ability to attract skilled professionals in the past.

At the same time, Moody's believes that there is also a low probability of positive ratings pressure, at least in the short term, as a result of the announced transaction. Such positive pressure could develop over the short term if all concerns relating to the proposed merger are resolved and if the bank demonstrates that synergies and franchise enhancement translate into sufficiently more robust income stream projections. This could in turn potentially enhance Burgan Bank's standing within the C- BFSR range, resulting in an upward movement in its Baseline Credit Assessment and upward pressure on deposit ratings.

Headquartered in Safat, Kuwait, Burgan Bank posted total assets of $10.4bn at the end of December 2007.