Fitch expects economic output in Kuwait to shrink by 2% in real terms in 2009, with output in the oil sector, which accounts for over half the economy, shrinking by 10%, following production cuts agreed with OPEC. Bank loan growth is thus expected to slow considerably, negatively impacting profitability, as banks take a more cautious approach to lending due to weaker economic conditions.
Kuwaiti banks’ exposure to risky asset classes is significant, with over half of the banking system loan book exposed to potentially risky sectors of the economy, including investment companies, real estate and construction, and lending for the purchase of securities. This exposes Kuwaiti banks to significant market induced credit risk. Fitch expects that exposure to these asset classes will lead to a further deterioration in banks’ asset quality in 2009. Profitability will also be negatively impacted as banks continue to increase impairment charges for both loans and investments.
The Kuwaiti Parliament is reviewing an $5bn financial stability law, which was approved by Emiri decree in March 2009. The law, which remains in force unless rejected by parliament, addresses banks, investment companies and the national economy. Fitch recognises that the law has the potential to improve the health of the country’s financial system; however, the agency is concerned by the delay in its implementation and the uncertainty about how it would operate in practice.
Fitch’s Long-term Issuer Default Ratings (IDRs) for all Kuwaiti banks are driven by sovereign support (Kuwait, rated AA/F1+). Downside risk to banks’ IDR ratings could arise from deterioration in the creditworthiness of the Kuwaiti sovereign, although at present Fitch considers the likely cost of support measures to be small in comparison to the resources available to the sovereign. In recent months, Fitch has downgraded a number of Kuwaiti banks’ Individual ratings (Kuwait Finance House, Al Ahli Bank of Kuwait and Commercial Bank of Kuwait). Individual ratings may come under further pressure if exposure to investment companies, real estate and construction, and lending for the purchase of securities leads to a marked deterioration in asset quality, profitability and capitalisation.
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