Rating lowered due to deteriorating asset quality and funding profile
Ratings agency Standard & Poor’s (S&P) lowered Commercial Bank of Kuwait’s (CBK) long-term credit rating to BBB from A- on 7 April, citing the bank’s weakened asset quality and funding profile.
“The rating action reflects our view that CBK’s asset quality has materially deteriorated, and is likely to continue its negative trend in the coming quarters, weighing heavily on CBK’s bottom-line profitability,” said S&P credit analyst Nicolas Hardy. “In addition, we believe that CBK’s funding profile weakened in 2009 because of an increased reliance on non-core customer deposits.”
Kuwait’s third-largest lender appears heavily exposed, directly and indirectly, to the real estate and construction sector, as well as to the performance of the local stock market, noted the agency.
“We believe that the negative trend in asset quality is not yet over and is likely to require substantial additional provisions that would have a significant impact on 2010 profitability.”
Non-performing loans (NPLs) stood at 17 per cent of total gross loans at the end of 2009, compared with less than 5 per cent at the end of 2008.
CBK made a 2009 net profit of KD152,000 ($526,500), down from KD100.7m in the previous year, after taking KD187.3m in provisions to cover loans and investments.
S&P also affirmed CBK’s A-2 short-term rating. The outlook is stable, reflecting the agency’s view that the bank’s capitalisation and pre-provisions earning generation capacity will provide a buffer to absorb additional asset quality problems.
“In addition, ongoing support from shareholders and authorities, through deposits, is likely to remain in place,” added the agency.
On the same day as S&P downgraded CBK, the bank’s shareholders announced that they had elected a new board of directors, after the old CBK board resigned in January.
The bank has not given a reason for their departure, but shareholders voted to delay releasing the old board from its responsibilities, after asking for their pay to be examined.