S&P Assigns BBB/A-2 Rtgs To Commercial Bank of Kuwait.

PARIS--(BUSINESS WIRE)--S&P's CreditWire 6/3/98--Standard & Poor's today assigned its triple-'B' long-term and 'A-2' short-term counterparty ratings to Commercial Bank of Kuwait (CBK). The outlook on the long-term rating is stable.

These ratings reflect the improvement in CBK's financial profile, which is now characterized by strong capitalization, good funding, and healthy profitability, as well as the implicit and explicit support it receives from the Central Bank of Kuwait. Offsetting these positive factors are the potential risks resulting from rapid loan growth and exposure to certain high-risk sectors. In addition, like all Kuwaiti banks, CBK faces the challenges of operating in a country whose economy is sensitive to the price of oil and offers a limited number of banking opportunities.

CBK's new management team has been largely responsible for revitalizing what was a sleepy institution. Since 1995, management has established a strategic plan, reduced staff, and increased market share. The bank is in the process of replacing all of its information technology systems and renovating its head office. But, since the management team is new, the turnaround has yet to be fully institutionalized.

CBK's adjusted common equity-to-risk-weighted assets ratio has been declining over the past four years because of the growth of the loan portfolio. Nevertheless, the year-end 1997 ratio of 21% gives the bank solid coverage against its operating environment and risk profile. Standard & Poor's understands that the loan portfolio should remain stable in 1998 and, thus, capital remain strong. The current rating assumes that any significant expansion in loans would be accompanied by a proportional equity increase.

In common with other Kuwaiti banks, CBK benefits from a large volume of customer deposits, which for CBK were equivalent to 66% of total footings at year-end 1997. This percentage has been rising over the past three years as a result of a deliberate effort to boost deposits, which the bank views as important to ensure proper liquidity. Customer deposits easily cover loans, as shown by a loan-to-deposit ratio of 59% at year-end 1997.

Net operating income after loan loss provisions amounted to Kuwaiti Dinar (KD) 22.4 million (US$75 million at KD 0.30 to US$1) in 1997, a healthy 1.85% average assets, while return on average equity stood at 17%. These ratios have been growing over the past three years, mostly because of the changing make-up of the bank's balance sheet, with a higher proportion of loans and lower proportion of Government Development Bonds. The bank's costs are low, as demonstrated by its operating expense-to-revenue ratio of 31% in 1997.

Analysis of the bank's net loans by economic activity shows the dominance of certain high-risk sectors, notably consumer and real estate lending. The loan book has also grown sharply over the past few years, but management claims that this growth will be significantly reduced going forward. Since the bank has suffered in the past from severe asset quality problems, mostly caused by the 1982 stock market crash as well as the Gulf War crisis and which are now fully provided for, the new management team follows stricter underwriting policies. Yearly provisions on the new portfolio are low given the bank's high-risk profile and its aggressive credit expansion, although the full impact of these strategies may yet be felt. Loan loss provisions as a percentage of average net loans have averaged 81 basis points over the past three years.

OUTLOOK: STABLE

The current rating takes into account the embedded credit risk of operating in a country whose economy is dependant on oil production and refining, and vulnerable to a prolonged drop in oil prices. In addition, given Kuwait's limited non-oil private-sector economy and small population, bank customers are limited in number, and concentration risk is an issue in terms of both loans and deposits. Standard & Poor's expects the bank to maintain its strong capital ratios and healthy operating profitability to provide cushions against these risks and their potential negative effect on asset quality, Standard & Poor's said.---CreditWire.

CONTACT: Alain Branchey, Paris (33) 1-4420-6690

Richard Thomas, London (44) 171-826-3627

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