Moody's downgrades Al Ahli Bank of Kuwait to A2/D+; stable outlook

The D+ rating now maps to a Baseline Credit Assessment (BCA) of Baa3. Consequently, ABK's long-term global local currency (GLC) and long-term foreign currency deposit ratings were also downgraded to A2 from A1, respectively. The bank's short-term GLC and short-term foreign currency deposit ratings were affirmed at Prime-1. All ratings carry a stable outlook.

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

"Moody's rating action reflects weakening credit conditions in Kuwait over the past 12 months, coupled with the poor performance of the Kuwaiti stock exchange (despite a moderate recovery in Q2 2009). The resulting rise in non-performing loans (NPLs) escalated the bank's credit and securities impairment charges," explains Stathis Kyriakides, AVP-Analyst in Moody's Financial Institutions Group at Moody's Limassol office.

Moody's says that ABK appears to have managed a timely containment of its exposures to high-profile domestic and regional corporate defaults, some of which were among the bank's largest customers; however, the rating agency notes that such residual exposures will maintain upward pressure on credit charges in the near term.

"Moreover, Moody's notes that the bank's loan book continues to display elevated risk, as a result of large single-party and industry concentrations to sectors that have experienced pressure over the past year," says Mr. Kyriakides.

These 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. At the same time, there are concerns over the corporate sector's links to both real estate and construction as well as to investment companies. ABK's lack of geographic diversification beyond its domestic market heightens the bank's exposure to the risks that have prevailed in the country's financial sector over the past year.

Although the bank's ratings currently carry a stable outlook, which is supported by adequate capitalisation and enduring operating income levels, looking forward, Moody's cannot rule out a downward change in ABK's ratings.

"ABK's ratings could come under increasing pressure if the bank is unable to arrest or reverse the upward trend in NPL levels," cautions Mr. Kyriakides.

The last rating action on ABK 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 Moody's action taken at the time to place Kuwait's foreign currency deposit ceiling on review for possible downgrade.

The principal methodologies used in rating Al Ahli 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, ABK had total assets of KD3.0bn ($10.3bn) as at the end of June 2009.