Fitch affirms Commercial Bank of Kuwait's IDRs; downgrades individual rating to 'C/D'

At the same time, its Individual Rating has been downgraded to 'C/D' from 'C'. Fitch has also affirmed CB's Short-term IDR at 'F1', its Support at '1' and Support Rating Floor at 'A+'.

CB's IDR and Support rating reflect the extremely high probability of support from the Kuwaiti authorities, in case of need. Fitch's assessment of support is based on CB's importance to the local economy and strong domestic franchise, the financial strength of Kuwait and its long history of supporting its domestic banks.

In Fitch's view, Kuwait's level of support has historically gone beyond that provided by most other supervisory authorities.

The downgrade in CB's Individual Rating reflects Fitch's concerns regarding the operating environment. The agency is concerned with the relatively high concentrations in the bank's loan book, with substantial exposure to riskier asset classes (real estate and equities) that are showing increasing signs of stress.

Over a quarter of the bank's loan book consists of exposure to the real estate and construction sectors, with a further 10% of exposure to Kuwaiti investment companies that in turn have substantial real estate and equity exposure. Another 15% of the loan book consists of share financing.

Although CB's reported asset quality remains sound, Fitch is concerned that the sharp fall in the value of equities (though there has been some recovery recently) and the slowdown in the real estate market are likely to have a negative impact on lenders to these sectors; not only on CB.

Revenue growth was strong in 2008, although unusually high provisioning expenses, most taken on the Central Bank of Kuwait's advice, led to a 16% drop in net profit for the year; the Central Bank has been encouraging all Kuwaiti banks to build up general reserves over and above the required minimum. Profitability in Q109 was impacted by relatively substantial investment write-downs; net profit declined to KD3m from KD34m in Q108.

There has been some deterioration in the bank's loan quality in Q109, mainly related to real estate lending, but loan quality remains sound with a non-performing loan ratio of 6.3% at end-Q109 (of which more than half relates to fully reserved pre-invasion impaired loans); total reserve coverage was satisfactory at 117%.

CB is the fourth-largest Kuwaiti bank by assets, accounting for about 12% of the sector. It provides a comprehensive range of corporate and retail banking products to the domestic market via an array of delivery channels, and has the second-largest branch network in Kuwait.