Moody’s downgrades Commercial Bank of Kuwait

Moody's Investors Service has downgraded the bank financial strength rating (BFSR) of Commercial Bank of Kuwait (CBK) to D+ from C-, and downgraded CBK's long-term global local currency (GLC) and foreign currency deposit ratings to A2 from A1.
The bank's short-term GLC and foreign currency deposit ratings remain at Prime-1. The bank's BFSR carries a stable outlook, although its position within the D+ range remains under pressure. Consequently, CBK's long-term GLC and foreign currency deposit ratings carry a negative outlook.
Moody's rating actions reflect the fact that the asset quality problems which emerged in 2009 are expected to continue to impact the bank's performance until at least Q2 2010. The challenges currently facing the bank are driven by the structure of its balance sheet — namely, the high level of single-party exposures as well as concentrations to sectors that performed weakly in 2009 (although over the past 9 months the bank has been actively reducing such exposures).
While the bank's balance sheet structure is not dissimilar to that of other domestic competitors of a similar size, CBK's asset quality has experienced a sharper deterioration, suggesting that its loan-vetting and monitoring practices are in need of improvement. It reported total assets of KWD 3.7 bln (US$ 12.6 bln) at the end of March 2009.
The performance of the bank in 2009 highlights the perils of high single-party exposures as the bulk of its new problem loans are understood to have resulted from some of CBK's largest customers.
The bank's balance sheet contracted in 2009, although this reportedly reflected the release of costlier customer deposits that had been maintained on its balance sheet for regulatory compliance purposes and were repaid by using bank placements. Nonetheless, Moody's notes that balance sheet contraction and lower business volumes (particularly lower documentary credit business), together with narrowing interest margins (partly reflecting the decline in the central bank's reference discount rate), are exerting pressure on operating income.
Ratings are supported at their current levels by the bank's robust capital levels. Although the bank did not raise new capital in 2009, capitalisation ratios improved due to the balance sheet contraction and lower off-balance sheet credit risk. Although the bank may need to increase spending to improve systems and processes, we expect its efficiency ratios to remain very good and to support its profit-generating capacity. Liquidity has tightened (because of the repayment of costly customer deposits, as mentioned above) but remains acceptable. Liquidity in the system remains ample supported by government-owned corporate deposits. Similar to its domestic competitors, CBK exhibits high funding reliance to government-owned corporate deposits, but such deposits have proven stable and are a feature of the Kuwait economy.