Moody's places NBK's ratings on review for possible downgrade

05/03/2011 00:00 AST

Moody's Investors Service has today placed National Bank of Kuwait's ("NBK") C+ standalone bank financial strength (BFSR) and Aa2 long-term global local currency (GLC) and foreign currency deposit ratings on review for possible downgrade.

Rating Rationale
Moody's decision to place NBK's ratings on review was prompted by: (i) expected pressure on asset quality arising from the bank's regional operations (particularly in Egypt), both in terms of lending as well as in investments in now lower-rated regional sovereigns; (ii) the subdued prospects for credit conditions domestically -- at least for H1 2011 given that the implementation of the Kuwaiti government's increased spending plans appears to have stalled -- which, combined with an uptick in problem loans, will affect bottom-line performance; and (iii) latent credit risk in the system arising from unresolved systemic problems in the Kuwaiti investment companies sector and an unconvincing recovery in the Kuwaiti real estate sector (particularly commercial real estate).

Nevertheless, NBK's financial performance remains strong and supports its standalone baseline credit assessment within the single-A range. The bank's reported asset quality (with NPLs at a low 1.65%) has exhibited resilience amidst adverse operating conditions in 2009 and 2010, thereby outperforming its domestic competitors.

Concurrently, NBK's strong capitalisation (Tier 1 capital adequacy ratio at 18.2%) underpins its loss absorption capacity and places the bank in a preferential position to grow by seizing opportunities that may arise once increased government spending materialises.

Moody's review of the bank's ratings will focus on a reassessment of the level of risk arising from its regional operations and the impact that this could, in conjunction with the evolution of domestic credit condition, have on its performance. The rating agency will also be reviewing the level of NBK's single-party and industry credit concentrations as well as domestic systemic risks.

Previous Rating Action and Methodologies Used
Moody's previous rating action on NBK was implemented on 5 August 2010, when the rating agency changed the bank's outlook for the foreign currency deposit rating to stable from negative. At the time, none of the bank's other ratings were affected by this action.

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007 and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

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