Moody’s downgrades 2 local banks
New lockdowns key risk
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 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.
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.
DUBAI: S&P Global Ratings today published its latest Insurance Industry and Country Risk Assessment (IICRA) report on Kuwait’s property/casualty (P/C) and insurance sectors.
These sectors carry an intermediate IICRA. Overall, the P/C and health sector in Kuwait remains profitable. It is supported by relatively low product risk – most local insurers predominantly retain short-tail motor and medical business, which has predictable claim settlements. The more complex risks are generally ceded to local and international re-insurance markets.
In our view, Kuwait’s insurance sector has positive medium-term growth prospects – it has been one of the fastest-growing insurance markets in the region. However, measures taken to contain the COVID-19 pandemic, including travel bans and curfews, will likely lead to a slowdown in premium growth and profitability in 2020. At the same time, our assessment of country risk is constrained by relatively high economic and geopolitical risks, widening government deficits, and relatively weak institutional settings.
Our industry risk assessment is derived from the industry’s satisfactory profitability, which is supported by relatively low product risks, modest barriers to entry, and strong medium-term market growth prospects.