Kuwait’s Burgan Bank downgraded, negative outlook

Moody's Investors Service has downgraded the bank financial strength rating (BFSR) of Burgan Bank (Kuwait) to D+ from C-. Consequently, the long-term global local currency (GLC) and long-term foreign currency deposit ratings were also downgraded to A2 from A1, respectively. All ratings carry a negative outlook.
Moody's rating action reflects weakening credit conditions in Kuwait over the past 12 months, the poor performance of the Kuwaiti stock exchange (despite a moderate recovery in Q2 2009), coupled with Burgan's elevated single-party and industry concentrations to sectors that have experienced pressure over the past year (real estate and construction, investment company sector, lending for purchasing securities).
Burgan's exposure to recent regional high profile corporate defaults is — as yet — unclear, potentially adding to upward pressure on non-performing loan (NPL) levels.
In addition, Burgan's related-party exposures (predominantly in the form of 'due from banks and other financial institutions') have risen materially since 2008. Although these exposures are partly explained by the fact that Burgan's parent (KIPCO) is among the largest corporate groups in Kuwait, current levels of related-party exposures are ratings negative.
Moody's currently regards as ratings neutral the Burgan's acquisition of Jordan Kuwait Bank (JKB) in July, Algeria Gulf Bank (AGB) in April and the pending acquisitions of Tunis International Bank (TIB) and Bank of Baghdad (BoB) — all of which are subsidiaries of United Gulf Bank (UGB), which in turn are subsidiaries of KIPCO. Burgan was to fund these acquisitions through KWD 200 mln (US$ 725 mln) of new capital issuance to which UGB was to fully subscribe (giving UGB a 20% stake in Burgan). However, the new share issue has been delayed by regulatory obstacles in Kuwait and instead UGB extended a KWD 97 mln (US$ 345 mln) subordinated loan to Burgan (at preferential rates) to partly finance the acquisition of the four banks. Burgan Bank had total assets of KWD 4.1 bln (US$ 14.7 bln) as at the end of June 2009.
Elevated loan loss provision and securities impairment charges represent a more immediate relevance to Burgan's ratings. In addition, Moody's notes that Burgan's domestic income-generating capacity is weak, although there is initial evidence that recent acquisitions (particularly JKB) are compensating for the drop of market-related gains thereby supporting the group's operating income.
The above notwithstanding, the Burgan Bank's financial fundaments remain good, thus supporting its current ratings.