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Thu 30 Oct 2008 02:50 PM

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Kuwait banking system 'still strong' - Moody's

But rating agency says real estate exposure could impact sector if slowdown persists.

Credit rating agency Moody’s on Thursday cast doubt on the health of Kuwait’s banking system on fears of exposure to falling house prices and local equity markets but said oil prices kept the sector "strong".

The Moody’s report gave the Gulf country’s banking system a stable to negative rating, and highlighted concerns over Kuwait’s undiversified economy and banks’ exposure to a weakening domestic property market.

The report, however, stressed that operating environment within Kuwait’s banking system was "strong" due to oil prices with net interest margins also robust.

It comes just days after the Kuwait Central government rescued the country’s fifth biggest lender, Gulf Bank, after it racked up big losses from derivative deals.

”The correction in residential real estate prices during 2008 has yet to translate into any evident deterioration in the quality of Kuwaiti banks' loan portfolios. However, if market pressures were to persist, non-performing loans would likely start to rise from their still low levels,” Moody’s assistant vice-president Stathis Kyriakides said in the report.

Moody’s said lending opportunities were poor in Kuwait, where half of the GDP comes from oil related activities.

Some banks were over-exposed to the real estate and construction sectors, the ratings agency added.  

After the bailout of Gulf Bank, the government on Wednesday guaranteed all deposits but concerns remain over the health of the oil-rich state’s banking system.

The state’s central bank governor this week denied Gulf Bank’s problems would spread to other lenders.

"I'm not worried at all about the others," Sheikh Salem Abdul-Aziz al-Sabah said on Wednesday.  

"The risk even with Gulf Bank now has been minimised and very shortly it will be restructured."

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