Moody’s down­grades 2 lo­cal banks

New lock­downs key risk

Arab Times - - FRONT PAGE -

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.

Rat­ings Ra­tio­nale

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.

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