Fitch paints difficult 2009 for Kuwaiti banks

Fitch Ratings has said that Kuwaiti banks are likely to face a difficult period in 2009, amid the sharp slowdown in global economic activity and a large decline in oil prices.

Fitch expects profitability to trend downward, as a result of slower loan growth, rising impairment charges (both for lending and investments) and the possibility of further negative mark-to-market valuations.

Kuwaiti banks' indirect exposure to the stock market is significant, said Fitch, in the form of loans to investment companies and lending for the purchase of shares, which exposes them to potential asset quality problems.

A slowdown in the real estate and construction sectors in Kuwait also has the potential to undermine asset quality, the report added.

The exposure of Kuwaiti banks to troubled investment companies was also a growing concern to Fitch. The outlook for this sector deteriorated rapidly in the second half of 2008, with the sharp fall in local equity prices, exposure to illiquid asset classes and reliance on short-term borrowing.

In January 2009, Fitch downgraded the Long-term Issuer Default Rating (IDR) of Global Investment House, the largest investment company in Kuwait, to 'D', following an announcement by the company that it had defaulted on the majority of its financial obligations.

Other investment companies in the sector are also reported to be in difficulties Fitch noted that the deteriorating financial condition of these companies could expose the local banking sector to potential asset quality problems, rising impairment charges and declining profitability.

In response, the Kuwaiti authorities announced a KWD1.5bn economic stimulus package earlier this month, which includes guarantees for new loans made by banks to investment companies.

The package is due to be debated in parliament and could potentially improve the health of the country's financial system, Fitch said.

Although most Kuwaiti banks rated by Fitch have reported headline numbers, Fitch said it was reviewing the banks' full audited financial statements and would make rating adjustments if required.

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