Moodys downgrades NBK and KFH

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LIMASSOL, Sept 24: Moody’s Investors Service, (“Moody’s”) has today downgraded National Bank of Kuwait SAKP (NBK) and Kuwait Finance House KSCP’s (KFH), the long term local and foreign currency deposit ratings to A1 and A2 from Aa3 and A1 respectively.

At the same time, the long-term Counterparty Risk Ratings (CRR) and Counterparty Risk Assessment (CRA) of NBK were downgraded to A1 and A1(cr) from Aa2 and Aa2(cr) respectively. KFH’s CRR and CRA were confirmed at the A1 and A1(cr) respectively.

The standalone baseline credit assessments (BCAs) and other ratings of these banks are unaffected by this rating action. Today’s action concludes the review on the banks’ ratings that was initiated on April 1, 2020.

The rating action follows Moody’s downgrade of Kuwait’s government issuer rating to A1 with a stable By Saeed Mahmoud Saleh Arab Times Staff and Agencies KUWAIT CITY, Sept 24: MP Muhammad Husain Al-Dallal has forwarded queries to Deputy Prime Minister, Minister of Interior and State Minister for Cabinet Affairs Anas Al-Saleh about the activities of the National Diwan for Human Rights since the appointment of its current board of directors.

He wants to know if the Diwan has submitted reports on human rights cases in the country, if it asked the concerned minister about any special or extra administrative or financial demands and the reply of the minister, if it received human rights related complaints from citizens and expatriates, mechanism for receiving and dealing with the complaints if any, and statistics in this regard.

He also requested for copies of the budgets of the Diwan for fiscals 2018/2019 and 2019/2020, details of annual expenditures. He said Article Nine of the law on establishing the Diwan stipulates the formation of permanent committees in charge of various tasks; so he inquired about the number of such committees, names of members, tasks and accomplishments. Lastly, he asked about the reason behind the non-allocation of a site for the Diwan.

Meanwhile, MP Riyadh Al-Adasani said Moody’s downgraded the credit classification of Kuwait from AA to A1; asserting this is a confirmation that he was right when he grilled Minister of Finance Barrak Al-Sheetan on the absence of a clear financial plan. He cited factors which led to the downgraded credit classification such as the reduction of cash, increase of securities in Euros and the increasing interests.

He pointed out that he presented solutions and recommendations to minimize expenditures and augment the public reserve through the collection of revenues retained by some public institutions and exchange assets of the Public Reserve Fund with cash from the Future Generations Fund but his recommendations were ignored. He added S&P also downgraded the classification of Kuwait to AA-, stressing that this is the result of ignoring warnings about the delay in rectifying mistakes since March 2020. In another development, a number of MPs commented on the meetings of HH Deputy Amir and Crown Prince Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah with several public figures. MP Saleh Al-Ashour said these meetings should include all components of the Kuwaiti society, stressing that any initiative towards national reconciliation will not be considered unless it includes those convicted in the Abdally Cell lawsuit and others. He asserted any reform document should not supersede constitutional institutions in general, and the Parliament in particular, considering the latter is a legislative and monitoring authority.

MP Ahmed Al-Fadl claimed the national document submitted by Political Science Professor Dr Abdullah Al Nefaissi and Law Professor Dr Obaid Al-Wassmi – a former MP – contains a crude introduction and wrong solutions. Also: KUWAIT CITY: Kuwait has drawn up a roadmap for financial and economic reforms in a bid to upgrade the country’s sovereign credit rating, a minister said on Thursday. Kuwait’s Supreme Council for Planning and Development, in conjunction with other state bodies including the finance ministry and the central bank, has been tasked with forming this plan, Minister of State for Economic Affairs Mariam Al- Aqeel said in a statement. A vital component of the plan is proper legislation ensuring that such reforms are sustainable and effective, said the minister, who emphasized that a better sovereign rating for a country “invariably means greater investment and lower borrowing costs”. ❑ ❑ ❑ KUWAIT CITY: Kuwait Municipality and the Ministry of Awqaf and Islamic Affairs are executing a project aimed at treating water used for ablution in mosques to water plants in Mubarakiya markets area. A small treatment chamber has been installed to treat and purify ablution water for the watering of plants in Mubarakiya markets area, Ahmad Al-Hajri, Director of Constructions at the Municipality, said in a statement. outlook. The decision to downgrade the government’s rating reflects both the increase in government liquidity risks and a weaker assessment of Kuwait’s institutions and governance strength. Despite the sovereign rating downgrade, Moody’s has maintained the Macro Profile it assigns to Kuwait at Strong -. This reflects the rating agency’s view that the Kuwaiti banking system’s financial performance will remain robust and that the standalone profiles of these banks are underpinned by their strong solvency and liquidity profile. The rating agency has changed the outlook on the long-term deposit ratings of the two Kuwaiti banks to stable from ratings under review in line with the stable outlook on the sovereign rating. A list of all affected ratings and assessments is provided at the end of this press release.

Ratings Rationale
The primary driver for today’s rating action is the downgrade of the Kuwaiti government’s – the support provider to the banking system in case of need – issuer ratings to A1 from Aa2.

Nonetheless, Moody’s assessment of the Kuwaiti government’s willingness to provide support remains unchanged at ‘very high’ reflecting (a) Kuwait’s very high stock of sovereign assets held in the Future Generations Fund (FGF) estimated at 359 percent of GDP as of the end of fiscal year 2019-20, (b) the Kuwaiti authorities’ long track record of supporting all the country’s banks and (c) NBK’s and KFH’s importance to the country’s banking system, as the two largest Kuwaiti banks by assets and deposits.

The long-term deposit ratings of NBK have been downgraded to A1 from Aa3. The A1 deposit ratings are based on the bank’s standalone BCA of a3 which remains unaffected and Moody’s assumption of a very high likelihood of government support, which now translates into two notches of uplift from three notches previously. The long-term deposit ratings of KFH have been downgraded to A2 from A1.

The A2 long-term deposit ratings of KFH are based on the bank’s BCA of baa3 which remains unaffected and Moody’s assumption of a very high likelihood of government support, which translates into four notches of uplift from five notches previously. The four notches of government support uplift is now consistent with other Kuwaiti banks. Moody’s has maintained the Strong – Macro Profile assigned to Kuwaiti banks. This reflects the rating agency’s view that the Kuwaiti banking system’s financial performance will remain robust and that the standalone profiles of these banks are underpinned by their strong solvency and liquidity profile.

While the sovereign rating action captures (a) increase in government liquidity risks, (b) deadlock over the government’s mediumterm funding strategy and (c) the absence of any meaningful fiscal consolidation, the macro-economic conditions for banks remains strong underpinned by continued government spending which weakens the government’s fiscal position but at the same time supports the non-oil economy, where the banks do vast majority of their business.

Additionally, the Central Bank of Kuwait’s hands-on regulatory approach supports the banking system’s stability and alignment with international standards. The conservative approach of the regulator is also evidenced by the CBK’s guidance following which the Kuwaiti banks’ have taken judgmental provision far in excess of the recently introduced IFRS 9 accounting standard. Consequently, the system average loan-loss provisioning coverage ratio has been consistently in excess of 250 percent providing significantly large cushion and supporting the solvency profile of the banks. The global banking system is well placed to absorb the economic shocks triggered by the coronavirus, but a second wave of the virus, leading to new blanket lockdowns or self-imposed changes in consumers’ behavior, poses a significant threat, Moody’s Investors Service said in a report today.

The outlook for global banks turned overwhelmingly negative in early 2020 as the pandemic struck and restrictions on economic activity began to bite. Over three-quarters of 70 Moody’s Banking System Outlooks are now negative, which contrasts with the 14 percent that were negative at the end of 2019. However, after ten years of broadly benign economic conditions, and relentless regulatory pressure to reinforce balance sheets, most banking systems are in good shape and can withstand the inevitable rise in bad debts over the coming months.

In addition, actions taken by central banks and governments to soften the virus impact have slowed the rise in asset risk and underpinned liquidity and funding. “In contrast to the financial crisis, the banking system is more likely to act as a shock absorber rather than an amplifier,” says Nick Hill, Managing Director – Banking at Moody’s Investors Service. “But a second wave of the pandemic that leads to new lockdowns and economic turmoil could cause more lasting damage to banks’ credit profiles.”

In a context of profound uncertainties, the ability to preserve and restore capital in the medium term will be a crucial support to banks’ credit worthiness. European banks are at an advantage because their starting capitalization is higher than banks in most other regions. Banks with more diversified business models – notably those with capital markets activities – will also prove more robust than those focused on more susceptible activities like lending to small businesses and corporates.

Challenges will be greatest in areas where profitability was already weak such as Japan and Europe, and where necessary restructuring is consuming pre-provision profits and reducing loss absorption. Similarly, rapid digitalization and low-interest rates will further compound the risks facing banks with lower efficiency.

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