LONDON, May 10: Standard & Poor’s Ratings Services announced today that it has taken the following rating actions on the four banks in Kuwait that it rates:
n  We have affirmed our ‘A+/A-1’ long- and short-term counterparty credit ratings on National Bank of Kuwait S.A.K. (NBK). At the same time, the outlook was revised to stable from negative.
n We have affirmed our ‘BBB+/A-2’ long- and short-term counterparty credit ratings on Al Ahli Bank of Kuwait (ABK). At the same time, the outlook was revised to stable from negative.
n We affirmed our ‘BBB+/A-2’ long- and short-term counterparty credit ratings on Burgan Bank. The outlook is still negative.
n We affirmed our ‘BBB-/A-3’ long- and short-term counterparty credit ratings on Gulf Bank. The outlook is still negative.
The creditworthiness of the Kuwaiti banking sector has been affected by the global economic downturn, which led to drops in real estate, oil, and equity prices in the State of Kuwait (AA-/Stable/A-1+). These three markets account directly or indirectly for most of the country’s corporate activities, and the price declines have eroded the financial standing of some borrowers—especially real estate dealers and local investment companies.
“Because of loan concentrations by single name, sector, and geography, which acted like a catalyst, asset quality has deteriorated significantly in the domestic banking system since 2008,” said Standard & Poor’s credit analyst Paul-Henri Pruvost. “Throughout 2009, the three markets continued to be weak and have ripple effects on borrowers. We believe that the economic recovery in Kuwait is still uncertain, especially for the real estate market and local investment companies. For that reason, we do not exclude that asset quality at Kuwaiti banks may decline further over the next quarters.”
However, the effects of the crisis have been uneven so far for these four banks, and we believe that NBK and ABK have been and are likely to remain more resilient than the other two. Excluding any shift in their risk appetite, we consider that the following factors are helping to stabilize their ratings: sound coverage of nonperforming loans by loan loss reserves (both still exceeding 100%), good preprovision earnings capabilities, and stronger and higher-than-domestic-peer-capitalization under our risk-adjusted capital (RAC) methodology. Conversely, and despite still adequate preprovision earnings capabilities, we believe that Burgan Bank’s and Gulf Bank’s asset quality has deteriorated to a much greater extent. Therefore, their provisioning needs are expected to be higher and take longer. We consider their capitalization to be markedly lower than ABK’s and NBK’s but adequate, with RAC ratios as of year-end 2009 slightly above the average for international peers. The negative outlook therefore reflects our concerns about asset quality and its potential further impact on their financial profiles.
“The funding position of the four banks remains shored up by deposits from Kuwaiti government-related entities,” Mr Pruvost added. “This ongoing support has helped to curb an excessive decline in lending, although banks have become increasingly reluctant to further commit themselves given the uncertain operating conditions. We expect the authorities’ funding support to remain in place.”

Under our methodology, we classify these four institutions as highly systemically important banks and consider that the Kuwaiti authorities are “interventionist” toward their banking sector. The long-term ratings on ABK, Burgan Bank, and NBK are therefore one notch higher than their stand-alone credit profiles, to reflect our expectation of the likelihood of extraordinary support from authorities in case of need. In Gulf Bank’s case, we increased the uplift to two notches from one in 2009, to factor in strong government support the bank received—funding support in late 2008 and capital support in early 2009.
Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor’s public website at www.standardandpoors.com.