July 16, 2009
Research Update:
Burgan Bank 'BBB+/A-2' Ratings Affirmed; Removed From CreditWatch Negative; Outlook Negative Primary Credit Analyst: Paul-Henri Pruvost, Paris (33) 1 4420 6691;
[email protected] Secondary Credit Analyst: Nicolas Hardy, Paris (33) 1-4420-7318;
[email protected]
Table Of Contents Overview Rating Action Rationale Outlook Related Research Ratings List
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Research Update:
Burgan Bank 'BBB+/A-2' Ratings Affirmed; Removed From CreditWatch Negative; Outlook Negative Overview • The weakened operating environment in Kuwait--which notably has led to some difficulties at local investment companies and exerts pressure on the domestic real estate sector--is expected to pressurize Burgan Bank's asset quality and profitability. • That said, we expect the bank's financial profile to weather the deteriorated operating environment at the current rating levels. • We are affirming our 'BBB+/A-2' long- and short-term ratings on Al Ahli Bank of Kuwait. • The negative outlook reflects the possibility that the impact of the deteriorating operating environment on the bank's financial profile becomes more severe than we currently anticipate.
Rating Action On July 16, 2009, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' long- and short-term counterparty credit ratings on Burgan Bank (Burgan). The ratings were removed from CreditWatch with negative implications where they were initially placed on Feb. 16, 2009. The outlook is negative.
Rationale The outlook revision reflects the possibility that we could downgrade Burgan if its financial profile deteriorates more than currently expected, and/or if capitalization is not strengthened. We expect Burgan's combined exposure to the real estate and construction sectors and troubled domestic investment companies to exert pressure on asset quality and profitability in the weakened operating environment. Factors supporting the ratings on Burgan include our expectation that its core operating performance will remain resilient, and ongoing system support from the authorities that further strengthen a sound funding and liquidity profile. The ratings are primarily constrained by the bank's weakened capitalization, a less supportive operating environment that is likely to negatively impact asset quality and earnings performance, and the bank's aggressive expansion outside its home market. We classify Burgan as a systemically important bank in Kuwait, which we classify as "interventionist" toward its banking system. The long-term rating on Burgan is therefore one notch higher than its stand-alone credit profile. This reflects our expectation of significant likelihood of the Kuwaiti
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Research Update: Burgan Bank 'BBB+/A-2' Ratings Affirmed; Removed From CreditWatch Negative; Outlook Negative
government providing extraordinary timely support to Burgan if needed. With total consolidated assets of $14.6 billion at March 31, 2009, Burgan is a midsize commercial bank by local standards, with about 70% of its consolidated assets based in Kuwait. Burgan revealed an ambitious expansion strategy in 2008, based on the acquisition of bank stakes held by its sister bank (United Gulf Bank, UGB; not rated). The first milestone was reached by securing majority ownership in Jordan Kuwait Bank (JKB; not rated) in July 2008, which accounted for about one-fifth of Burgan's consolidated assets. Burgan continued its overseas expansion during the first half of 2009, acquiring UGB's stake in Iraqi and Algerian commercial banks using its own resources. Although we expect the geographic expansion strategy to benefit Burgan's business profile and earnings diversification, the bank's ability to replicate its tight risk management practices--to limit credit and operational risks in higher-risk countries--will be tested. In the context of an economic downturn, which has severely impacted the real estate and equity markets, credit risks are likely to materialize, in our opinion. Specifically, real estate and construction assets represented about 3.6x the bank's adjusted total equity (ATE) at March 31, 2009. Exposure to local investment companies stood at about 0.7x the bank's ATE at the same date. We consider these exposures as the bank's main sources of credit risk. The length and magnitude of the deterioration in the operating environment remains difficult to assess. However, it started to take its toll on Burgan's financial performance in 2008 through sizable additional general provisions. Asset quality deteriorated markedly during the first quarter of 2009. Although nonperforming loans (NPLs) as of March 31, 2009, are somewhat inflated by NPLs since solved, and loans classified as a precautionary measure, it demonstrates the negative trend in asset quality. We also have some concerns on the credit risk of new subsidiaries, which are all located in higher-risk countries than Kuwait. On a positive note, Burgan has built a cushion of provisions that should partially alleviate the pressure on its asset quality and profitability. We understand that Burgan has plans to strengthen its capitalization during the second half of 2009, which we consider critical to maintaining its ratings at their current level. The ratio of ATE to total assets stood at 6.3% at March 31, 2009. Funding and liquidity remain at sound levels due to ongoing system support from the authorities.
Outlook The negative outlook reflects the deteriorated operating environment and its expected impact on Burgan's financial profile. We could lower the ratings if the impact of the real estate market correction and local investment companies' troubles on the bank's financial profile prove more severe than expected; if capitalization is not strengthened; or international expansion proves riskier than expected. We could revise the outlook to stable if identified sources of credit risk do not materialize, and the overall financial profile proves resilient.
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Research Update: Burgan Bank 'BBB+/A-2' Ratings Affirmed; Removed From CreditWatch Negative; Outlook Negative
Related Research • "Rating Actions Taken On Five Kuwaiti Banks Following S&P Review," July 16, 2009 • How Systemic Importance Plays A Significant Role In Bank Ratings, July 3, 2007
Ratings List Ratings Affirmed; CreditWatch/Outlook Action To Burgan Bank Counterparty Credit Rating BBB+/Negative/A-2 Certificate Of Deposit BBB+/A-2 Commercial Paper A-2
From BBB+/Watch Neg/A-2 BBB+/Watch Neg/A-2 A-2/Watch Neg
Additional Contact: Financial Institutions Ratings Europe;
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