CI affirms Commercial Bank of Kuwait's ratings

06/06/2017 09:47 AST

Capital Intelligence Ratings (CI) has affirmed the Long-Term Foreign Currency Rating (FCR) of Commercial Bank of Kuwait (ComBK) at 'A+' and the Short-Term FCR at 'A2'. The Outlook on these ratings remains 'Stable'.

Based on a statement by the rating agency, the Support Rating is maintained at '1', reflecting both the Kuwait government's blanket guarantee of all customer deposits placed in Kuwait, and the record of both the central bank and wider Kuwaiti government in supporting Kuwaiti banks in times of need.

CI Ratings also affirms ComBK's Financial Strength Rating (FSR) at 'A-'. The rating is supported by strong asset quality and much more than full loan-loss reserve (LLR) coverage, together with both a good capital position and good liquidity. Although profitability is good at the operating level, the rating is to some extent constrained by continuing weak profitability at the net level due to continued high provisioning.

CI explained that there had been some hope that this might have slackened last year, but instead the cost of credit has risen as the Bank moved to rebuild reserves depleted by legal settlements. The other main constraints are the concentrations (although these are reducing) in both the loan book and the deposit base, although the latter is mainly due to (desirable) longer tenor government sector placements. The Outlook on the FSR is 'Stable'. As the Support Rating is '1', the Long-Term FCR is set two notches above the FSR.

ComBK is Kuwait's fifth largest, conventional commercial bank. Members of the country's ruling family maintain a controlling ownership interest in the Bank. Historically, the Bank has demonstrated good asset quality, strong capital ratios and good profitability. The one longstanding vulnerability has been concentrations in both loan and the deposit bases, although reducing these is one of the bank's strategic aims and significant progress has been made. Asset quality ratios have now been restored to their very strong pre-2009 levels and the bank's overall financial condition (except perhaps for profitability at the net level) continues to be good, although ROAE does exceed the peer group average.

CI expects ComBK to maintain strong asset quality on LLR coverage metrics, strong capital adequacy, and good liquidity. Profitability is likely to remain good at the operating level but may continue to be constrained at the net level. The Bank is likely to continue to replenish its various loss reserve accounts (loan, investment and legal) and the cost of credit is therefore expected to continue to be high, although there may be some relief later in 2017 going into early 2018. The very conservative provisioning stance has served the bank well, allowing adverse legal judgments to be met financially without any extraordinary harm to either P/L or TCI.

According to CI, overall strategy continues to be very conservative. Although to date the policy response of the Kuwaiti government to falling oil prices has been good (some economies in current spending offset by CAPEX on projects), oil prices show little sign of sustained recovery and this may in due course impact government investment and/or domestic liquidity - although the latter is strong at present, in contrast to the situation in some other GCC countries. ComBK management does not see this as being an appropriate time to be seeking strong loan growth. Instead, the Bank will be content to maintain both loan book and asset base at close to existing levels and instead focus on improving quality rather than growing quantity.

Capital Intelligence