Standard & Poor's Ratings Services has announced that it has lowered its long-term counterparty credit rating on Gulf Bank to 'BBB+' from 'A-' and affirmed the 'A-2' short-term rating besides giving negative outlook to four other Kuwait banks.

The rating agency affirmed the 'A-/A-2' ratings on Kuwait Finance House (KFH) and Commercial Bank of Kuwait (CBK) and the 'BBB+/A-2' ratings on Al Ahli Bank of Kuwait (ABK) and Burgan Bank.

The negative outlooks on Gulf Bank, KFH, CBK, ABK, and Burgan Bank reflect our expectation that increased credit risk is likely to weigh negatively on these banks' financial profiles, said S&P in a statement.

'Under our base-case scenario, we expect the financial profiles of these banks to remain adequate for the current ratings. However, if the operating environment worsens and/or if the financial profiles of these banks- especially asset quality, financial performance, or capitalization--is more adversely affected than we currently expect, the ratings would come under pressure,' the statement said.

'On the upside, all other things being equal, we could revise the outlooks to stable, on a case by case basis, if operating pressures ease, if supportive measures that the government takes materially improve the stand-alone credit profiles of these banks, or if they demonstrate superior resilience to current market and economic conditions.'

S&P said it has removed all ratings from CreditWatch with negative implications, where they had been placed on February 16, 2009 (and on October 27, 2008, for Gulf Bank). The outlooks on all these ratings are negative.

'The downgrade on Gulf Bank reflects our view that its stand-alone credit profile has deteriorated following large losses in 2008 and material asset quality deterioration.'

'Furthermore, Gulf Bank's combined exposure to Kuwait's real estate and construction sectors, domestic investment companies, and a couple of troubled regional corporate clients will likely pressure the bank's asset quality, profitability, and capitalization.'

'While KFH, CBK, ABK, and Burgan Bank are also broadly exposed to the same economic sectors in Kuwait, we have affirmed our ratings on these entities, taking into account bank-specific mitigating factors, as we expect the banks' financial profiles to better weather the deteriorated operating environment at their current rating levels.'

'However, the negative outlooks reflect the fact that we do not rule out that the banks' respective stand-alone credit profiles could deteriorate more than we currently expect because of their material exposure to the real estate and construction sector, and to local investment companies--all of which have entered a correction period.'

The Kuwaiti banking sector's total exposure to domestic investment companies stood at about $9.1 billion at May 31, 2009. Individual banks show wide differences in their respective gross exposure, ranging from 40 per  cent  to 120 per cent of their adjusted total equity (ATE).

At the same time, collaterals against these exposures vary from 20 to 60 per cent. Some banks took provisions against these exposures in the last quarter of 2008 and first quarter of 2009, denting their bottom-line results for the period.

We anticipate that more provisions will be required in the coming quarters. But predicting the amounts is difficult due to the heterogeneity of the investment companies' business and financial profiles and shareholding structures.

The Kuwaiti real estate market has entered a correction period since summer 2008. Kuwaiti banks' exposure to the real estate and construction sectors is high, stretching from about 1.5x to 3.6x of ATE for these five banks. The level of collateral attached to these exposures appears