Moody's Investors Service has upgraded to C- from D+ the financial strength rating (FSR) of Commercial Bank of Kuwait (CBK). The A2/Prime-2 foreign currency ratings and their outlooks remain unchanged. The outlooks on all ratings are stable.
According to Moody's, this rating action recognises CBK's consistently strong financial performance, in particular, the bank's much-improved profitability and its strengthening asset quality, underscored by declining levels of problem loans and rising provisioning coverage. The FSR further reflects CBK's strong franchise in its domestic market. CBK is the third-largest bank in Kuwait, with strong market shares in both retail and corporate banking. Through innovation, a strong focus and significant investments in infrastructure in recent years, the bank has built a solid franchise in retail banking in Kuwait. Finally, Moody's notes that CBK's FSR rating is underpinned by a currently strong operating environment.
At the same time, CBK's FSR remains somewhat constrained by the relatively limited domestic operating environment characterised by a largely undiversified economy still heavily dependent on oil and other hydrocarbon revenues, and by the bank's lack of geographical diversification. Moreover, the risk of potentially overheated equity and real estate markets in all GCC states, including Kuwait, and the bank's exposure to the local equity market (primarily via margin lending) is also a potential cause for concern with regards to asset quality, especially if macro and stock market conditions deteriorate. However, we note that the bank does retain substantial collateral value against such lending, somewhat mitigating our concerns.
CBK's C- FSR could in future benefit from (a) enhanced retail deposit penetration in Kuwait and further improvements in asset quality and overall performance, and (b) further development in the economic environment, which could lead to an expanded corporate base, resulting in reduced funding and credit concentrations. At the same time, Moody's cautions that, although no such trend is currently evident, a significant and sustained deterioration in CBK's asset quality or capital levels could lead to a lower FSR. Moreover, any future acquisition may possibly put negative pressure on the ratings, depending on the actual structure of the transaction.
Headquartered in Kuwait, Commercial Bank of Kuwait had total assets of KWD2.026 billion (US$6.935 billion) as of 30 September 2005.