Fitch affirms Commercial Bank of Kuwait at 'A+'

The rating Outlook on the Long-term IDR remains Stable. The Support Rating Floor is affirmed at 'A+'.

CB's Issuer Default and Support ratings reflect the extremely high probability of support being provided by the Kuwaiti authorities, in case of need. Fitch's assessment of support is based on the financial strength of Kuwait, its long history of supporting its domestic banks and CB's importance to the local economy.

The Individual rating reflects the bank's good domestic franchise and sound profitability, but also takes into account relatively high concentrations in its loan and funding profiles, significant exposure to local equities and the bank's reliance on a small and undiversified economy. Upside potential for CB's Individual rating is currently limited given its risk profile. Downside potential could arise from a further increase in exposure to the real estate or construction sectors, which remain susceptible to an adverse change in market values in the event of a downturn, or an increase in lending to clients to purchase securities. Any acquisition that materially increases the bank's risk profile would also be negative for the Individual rating.

CB's exposure to the real estate and construction sectors increased significantly in 2007 and H108. Given rapid appreciation in property prices in Kuwait, exposure to these sectors is a cause for concern. Loans to companies to finance the purchase of equities represented a high 15% of gross loans at end-June 2008 and present a significant risk if high levels of collateral were to be rapidly eroded by a volatile stock market.

CB's profitability is sound. Net income increased 16% yoy in H108 and 20% in 2007, due to loan growth, an increase in fee income and realised gains on investment securities. CB's cost/income ratio is one of the lowest in Kuwait at just 15% in H108.

Following rapid loan growth in 2007, CB's capital ratios declined significantly. At end-2007 CB's tier 1 and total capital ratios stood at 12% and 14.6%, respectively. Capital ratios declined further in H108 to 10.1% and 12.5%, respectively (they exclude interim profits for the period), due to new regulations introduced by the CBK, which increase the risk weighting for consumer loans, loans for the purchase of shares and loans to the real estate sector. The Fitch eligible capital ratio stood at an adequate 12.1% at end-June 2008. Fitch believes that capitalisation would need to be supplemented if any significant acquisition were made.

CB was the fourth-largest bank in Kuwait by total assets at end-2007. It serves retail and corporate customers. CB currently has the second-largest branch network in Kuwait (51 branches), which gives it a strong position in the local retail banking market. At end-2007, CB's main shareholder was East Holding Group with 23%. East Holding Group is a private holding company of a branch of the Kuwaiti ruling family which invests in a diverse range of industries, typically for the long term.