Moody's downgrades Commercial Bank of Kuwait to A1/C-; negative outlook

The C- rating now maps to a Baseline Credit Assessment (BCA) of Baa2. Consequently, CBK's long-term global local currency (GLC) and long-term foreign currency deposit ratings were also downgraded to A1 from Aa3, respectively. The bank's short-term GLC and short-term foreign currency deposit ratings were affirmed at Prime-1. All ratings now carry a negative outlook.

Today's rating action concludes the review for downgrade that Moody's initiated in December 2008 and then reiterated after the rating agency's decision to place Kuwait's sovereign ratings on review for possible downgrade in March 2009.

"Moody's rating action reflects the weakening credit conditions in Kuwait over the past 12 months and the poor performance of the Kuwaiti stock exchange (despite a moderate recovery in Q2 2009), which has led to rising credit and securities impairment charges," explains Stathis Kyriakides, AVP-Analyst in Moody's Financial Institutions Group at Moody's Limassol office.

The large increase in credit charges in H1 2009, which are understood to incorporate partial provisions relating to the bank's exposure to recent regional and domestic corporate defaults, suggest that CBK's non-performing loans (NPLs) have increased significantly and are on an upward trajectory.

Moody's believes that CBK's asset quality and credit charges will remain under pressure in the foreseeable future given (i) the likelihood that existing NPLs will require additional provisioning, and (ii) the time lag observed between credit-negative events and observable evidence of rising delinquencies.

"Moreover, in common with other Kuwaiti banks, CBK's loan book continues to contain elevated risk as a result of large (albeit easing somewhat in H1 2009) single-party and industry concentrations to sectors that have experienced pressure over the past year," says Mr. Kyriakides.

Such sectors include: (i) real estate and construction (predominantly commercial real estate and construction); (ii) the embattled Kuwait investment company sector; and (iii) lending for purchasing securities. Moody's adds that CBK's lack of geographic diversification beyond its domestic market heightens the bank's exposure to the type of risks that have prevailed in the country's financial sector over the past year.

On the positive side, Moody's believes that CBK's ratings are supported by the bank's good domestic franchise, its currently strong capitalisation ratios and its pre-provision income-generating capacity.

"Nonetheless, the extent to which rising NPLs and credit charges impact capitalisation levels (and the bank's future risk-adjusted income-generating capacity) will have a bearing on the evolution of CBK's ratings," cautions Mr. Kyriakides.

Moody's notes that the high 14% contraction of CBK's balance sheet in H1 2009 partially reflected the relaxation of the central bank's credit growth restrictions, linking credit growth to customer deposits, and allowed the bank to dispense with expensive corporate funding. Nonetheless, concentration on the liability side of the balance sheet is high, predominantly arising from sizable government and government-related funding (currently inexpensive and ostensibly stable).

The last rating action on CBK was implemented on 19 March 2009, when Moody's maintained the bank's ratings on review for possible downgrade, stating that it was not affected by the sovereign action taken at the time to place Kuwait's foreign currency deposit ceiling on review for possible downgrade.

The principal methodologies used in rating Commercial Bank of Kuwait are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at Moody's website in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Kuwait City, Kuwait, CBK had total assets of KD3.7bn ($12.8bn) as at the end of June 2009.