Moody's Investors Service has placed on review for possible downgrade of the long-term deposit rating and bank financial strength rating (BFSR) of four Kuwaiti banks.

The banks include National Bank of Kuwait at Aa2/B-, Commercial Bank of Kuwait at Aa3/C, Al Ahli Bank at A1/C- and Bank of Kuwait and the Middle East at A1/C-.

These actions have been prompted by Moody's concerns over the banks' exposures to: (i) real estate (particularly commercial real estate) and (ii) lending for purchasing securities.

In addition to evidence indicating that demand in the Kuwaiti real estate market weakened during the first ten months of 2008, the steep decline of the local stock market between September and November 2008 could weigh further on real estate demand and has also caused significant problems for Kuwaiti investment companies and tensions in the local financial market.

Moody's also cautioned that a stock-market-related loss of wealth by Kuwaiti households and corporates alike could result in rising delinquencies on bank loans extended for securities purchasing purposes, although all banks report that thus far this has not been the case and that loans remain adequately collateralised by a combination of stocks and real estate.

The situation is further complicated by new central bank instructions which reportedly limit bank's flexibility to sell securities held as collateral.

On the one hand, Moody's acknowledged that the central bank's reported action may have restrained an even steeper decline in stock market prices; however, such action could potentially hinder banks' capacity to exit their positions in the event of growing customer
delinquencies.

'Moody's is also concerned that the recently announced support mechanism for Kuwait's investment companies, which among other thinks calls on the country's banks to extend long-term secured funding to such companies, could have a material impact on the composition of banks' balance sheets and divert resourses to activities that do not contribute to their franchise evolution,' notes Stathis Kyriakides, lead analyst at Moody's for Kuwaiti banks.

Finally, recent events have highlighted the long-identified need for institutional reform in Kuwait (particularly with regard to the operations of the Kuwait Stock Exchange), while political unrest culminating in the recent resignation of the government is unlikely to contribute to the restoration of calm in the financial markets.

In reviewing the banks' ratings, Moody's will also examine the implications of likely developments in the Kuwaiti real estate and stock markets, the potential impact that these may have on each individual bank as well as progress achieved in the implementation of the authorities' support mechanism for Kuwaiti investment companies and its effects on the banking sector in general and each bank individually.-TradeArabia News Service