Moody's downgrades BKME (Kuwait) to A3/D+, negative outlook

The D+ rating maps to a Baseline Credit Assessment (BCA) of Baa3. Consequently, BKME's long-term global local currency (GLC) and long-term foreign currency deposit ratings were also downgraded to A3 from A1, respectively. The bank's short-term local and foreign currency deposit ratings were affirmed at Prime-1. All ratings carry a negative outlook.

Today's rating action concludes the review for downgrade that Moody's first 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 the bank's declining position due mainly to (1) weakening credit conditions and asset quality pressures resulting in elevated credit charges; (2) lower market related gains; (3) some industry concentrations to the real estate and construction sector which has experienced increasing pressure in recent months; and (4) indirect exposure to equities through loans for investing in securities,"

explains Stathis Kyriakides, AVP-Analyst in Moody's Financial Institutions Group at Moody's Limassol office.

Although bank lending in Kuwait is secured, and notwithstanding the partial recovery of regional stock markets in recent months, Moody's notes that the bank's loan book contains elevated credit risk. Additionally, the downgrade reflects BKME's increased reliance on wholesale funding and higher concentrations in the bank's deposit base.

The negative rating outlook reflects Moody's expectation that pressure on asset quality and credit charges will persist, particularly in view of the time lag between negative market events and observable evidence of rising non-performing loans (NPLs).

BKME's management reports that the bank's conversion from a conventional to an Islamic bank (expected to be completed by YE2009) is ahead of schedule and that the response from clients has so far been positive.

"Although the successful completion of the process would provide BKME a strategic focus and a clearly defined target market, Moody's cautions that the bank currently continues to face transition risks," says Mr. Kyriakides.

The D+ rating also reflects the bank's franchise value as the sixth-largest bank in Kuwait, its current comfortable capital position and high cost efficiencies. The A3 rating captures the very high likelihood of support from the State of Kuwait should the need arise.

Moody's notes that BKME enjoys significant benefits from being part of the Bahrain-based AUB Group, which has total assets in excess of $25bn The last rating action on BKME 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 BKME 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 the 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 Safat, Kuwait, Bank of Kuwait and the Middle East had total assets of KD2.4bn ($8.3bn) as at the end of June 2009.