Moody's reviews UGB for possible downgrade.
The Baa3 senior unsecured and Ba1 subordinated debt ratings of the bank were also placed on review for possible downgrade.
The decision to initiate a review of UGB's D+ BFSR, representing the bank's standalone financial strength, is related to last week's downgrade to Baa2 from Baa1 of the issuer rating of Kuwait Projects Holding Company (Kipco) - UGB's majority shareholder.
Moody's explained that its assessment of UGB's standalone financial strength incorporates the ongoing benefits of belonging to the Kipco Group, manifested in the form of business origination, fee income flows and funding. Although the downgrade of Kipco does not imply the cessation of these benefits, the parent company's reduced financial flexibility compounds existing pressure on UGB's standalone financial strength, within the context of a challenging operating environment for Middle-East based securities firms.
The outlook on UGB's D+ BFSR has been negative since September 2009.
Moody's notes that at the end of December 2009 UGB received roughly 40 per cent of its funding from Kipco and other group companies, while it also generates about one quarter of its core revenues in the form of asset management and advisory fees from its parent, on an ongoing basis.
On average over the past 24 months core revenues and also proprietary investment income have been under pressure, while the traded value of certain large long-term investments in associates remains significantly below carrying cost, constraining capitalisation.
These developments, together with current challenging wholesale funding markets mirror broader industry trends that have led to the downgrade of regional peers over the past few months. It is a context that has elevated the role of Kipco as a business and funding source at a time when the parent firm exhibits reduced financial flexibility.
Moody's added that the review on UGB's Baa3/Prime-3 deposit ratings is driven primarily by the review on the D+ BFSR, equivalent to a baseline credit assessment (BCA) of Ba1.
UGB's current Baa3 long-term deposit is based on the bank's standalone rating of Ba1 and also incorporates one notch of parental support. This parental support factors Moody's assumptions about a moderate probability of support from Kipco as well as Kipco's issuer rating. The downgrade of Kipco's issuer rating to Baa2 from Baa1 does not on its own lead to a downgrade in UGB's supported rating of Baa3.
During the review period, Moody's will be benchmarking UGB's standalone financial strength against those of regional peers and testing the resilience of the bank's franchise, earning power, funding profile against the regional asset management, proprietary investment and funding contexts. It is expected that the eventual rating will continue to incorporate some uplift as a result of parental support.
The last rating action on UGB was on February 2, 2010 when Moody's assigned ratings to the bank's $1 billion EMTN programme.
Headquartered in Manama, UGB reported total balance sheet assets of $2.28 billion at the end of March this year.- TradeArabia News Service
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