Fitch Ratings has affirmed the Bank of Kuwait & the Middle East's (BKME) ratings at long-term issuer Default (IDR) 'A-' (A minus) with stable outlook, short-term IDR 'F2', individual 'C' and support '1'.

BKME is a medium-sized Kuwaiti commercial bank, providing a broad range of retail, corporate, treasury and investment management services.

The support rating floor is affirmed at 'A-' (A minus).  BKME's IDRs and Support rating reflect the extremely high probability of support from the Kuwaiti authorities, in case of need, the Fitch said.

The individual rating not only reflects the bank's sound asset quality and improving profitability and cost efficiency, but also the bank's relatively modest franchise, declining capital adequacy ratios and reliance on a relatively small and undiversified economy.

Upward potential to the individual rating may arise if the bank succeeds in growing its franchise. Downside risk could arise if the bank's profitability, funding and/or capital adequacy were to come under significant pressure.

BKME's operating profit increased 34.9 per cent year on year in the first half of 2008 and 11.9 per cent in 2007, driven by growth in fee income, primarily from the bank's brokerage/investment management activities, and, notably in the first half of 2008, significant gains on the sale of equity investments.
However, net interest revenue has been under pressure as Kuwaiti banks compete for corporate deposits to comply with the 80 per cent loan/deposit ratio imposed by the Central Bank of Kuwait (CBK).

The impaired loans/total loans ratio worsened slightly to 3.1 per cent in the first half of the year but impairment reserve coverage was sound at 122 per cent.

According to Fitch report, the loan growth had slowed in 2008. There is some concentration in real-estate lending and share-financing, as well as by borrower, though this is not unusual in Kuwait, it said.

Market risk is limited and mainly relates to its portfolio of equity investments. Funding consists largely of customer deposits, where there is some concentration but they have proved stable.

Liquidity is supported by a portfolio of Kuwaiti government bonds and interbank placements, as well as facilities with group entities and other banks. Regulatory capital ratios have declined in the first half of 2008, mainly due to regulatory changes.

At the end of June 2008, the bank's Tier 1 and total capital ratios were, nevertheless, adequate at 10.6 per cent and 13.2 per cent respectively. The Fitch eligible capital ratio stood at 13.2 per cent.

In August 2005 Bahrain-based Ahli United Bank (rated 'A-' (A minus)/Stable) increased its stake in BKME to 75 per cent from 48 per cent. BKME is fully integrated into the AUB Group.-TradeArabia News Service