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Tue 8 Sep 2009 11:24 PM

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Moody's downgrades Kuwait’s BKME

Financial strength rating of Bank of Kuwait and the Middle East cut in response to weakening credit conditions.

Moody's on Tuesday downgraded the bank financial strength rating (BFSR) of
Bank of Kuwait and the Middle East

to D+ from C-.

The D+ rating maps to a Baseline Credit Assessment (BCA) of Baa3. As a result, the bank’s long-term global local currency (GLC) and long-term foreign currency deposit ratings were also downgraded to A3 from A1, respectively.

The bank's short-term local and foreign currency deposit ratings were affirmed at Prime-1. All ratings carry a negative outlook.

Moody’s action concludes the review for downgrade that it first initiated in December 2008 and then reiterated in March 2009 after the agency's decision to place Kuwait's sovereign ratings on review for possible downgrade.

"Moody's rating action reflects the bank's declining position due mainly to (1) weakening credit conditions and asset quality pressures resulting in elevated credit charges; (2) lower market related gains; (3) some industry concentrations to the real estate and construction sector and (4) indirect exposure to equities through loans for investing in securities," said Limassol-based analyst Stathis Kyriakides.

Although bank lending in Kuwait is secured, and notwithstanding the partial recovery of regional stock markets in recent months, the agency noted the bank's loan book contains elevated credit risk.

Additionally, the downgrade reflects

's increased reliance on wholesale funding and higher concentrations in the bank's deposit base.

The negative rating outlook reflects Moody's expectation that pressure on asset quality and credit charges will persist, particularly in view of the time lag between negative market events and observable evidence of rising non-performing loans (NPLs).


's management reports that the bank's conversion from a conventional to an Islamic bank (expected to be completed by end-2009) is ahead of schedule and that the response from clients has so far been positive.

"Although the successful completion of the process would provide

a strategic focus and a clearly defined target market, Moody's cautions that the bank currently continues to face transition risks," said Kyriakides.

However, the agency noted that

enjoys significant benefits from being part of the Bahrain-based AUB Group, which has total assets in excess of $25 billion.

As of June 2009
Bank of Kuwait and the Middle East

had total assets of KD2.4 billion ($8.3 billion).

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