Moody’s downgrades BKME Kuwait; negative outlook

Moody's Investors Service has downgraded the bank financial strength rating (BFSR) of Bank of Kuwait and the Middle East (BKME), the sixth largest bank in the country, to D+ from C-. 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. All ratings carry a negative outlook.
"Moody's rating action reflects the bank's declining position due to weakening credit conditions and asset quality pressures resulting in elevated credit charges; lower market related gains; some industry concentrations to the real estate and construction sector which has experienced increasing pressure in recent months; and indirect
exposure to equities through loans for investing in securities," explained Stathis Kyriakides, analyst in Moody's Financial Institutions Group in Limassol.
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," Kyriakides said.
Moody's notes that BKME enjoys significant benefits from being part of the Bahrain-based AUB Group, which has total assets in excess of USD 25 bln. Headquartered in Safat, BKME had total assets of KWD 2.4 bln (USD 8.3 bln) as at the end of June 2009.