Sunday, September 26, 2010

Commercial Bank of Kuwait Terminates S&P Ratings


On 23 September, S&P announced it was withdrawing from rating CBK at the bank's request.  In line with standard operating procedure for rating agencies, S&P gave a final rating.
S&P affirmed its 'BBB/A-2' long- and short-term counterparty credit ratings on Commercial Bank of Kuwait
(CBK) with a stable outlook. 
The rating agency said it had bumped up CBK's rating by one notch to reflect that it was a systemically important bank and that the likelihood of government support was high. 

Then it went on to say that it estimated CBK's distressed loans at 20% of the total loan portfolio.  And that provisioning needs are likely to weigh heavily on the bank in the next two years.  

It's clear from that language that CBK is not providing current data.  Either the deterioration in the loan portfolio is sudden or S&P just got an inkling.  In any case, not a sign of the sort of candor one would expect between issuer and rating agency.

I suspect the ongoing problems in the loan portfolio and S&P's likely future focus on them were the reason for the bank's "excusing" the agency from further rating duties.

Some thoughts:
  1. CBK is not alone in its aggressive business posture.  This suggests that other banks may be experiencing increases in their distressed loans.  CBK as the proverbial canary in the coal mine.  The banking system had just under 10% at FYE 2009 - already a distressed scenario.  
  2. This a rather short-sighted though common reaction.  Shoot the messenger for delivering bad news.  Pretend that everything is OK. The problem is that CBK's loan portfolio will not recover miraculously.  Future earnings statements will reflect the provisions.  And the fiscal year end report will reflect the percentage of distressed loans.  Frankly, this just looks bush league.  
  3. In addition,  Fitch and Capital Intelligence rate CBK as well - and both have downgraded the bank earlier.   If distress continues, they are likely to do so again. And this leaves CBK then in the distinguished company of Dubai Inc.  Perhaps, not exactly the sort they should be palling around with at present.

22 comments:

Laocowboy2 said...

Leaving aside the "own goal" aspects of firing a rating agency, there was an elegant symetry to some of the items in the blog over the last day or so. Looking at the real estate and investment company exposures of the Kuwaiti banking system pretty well says it all about where the asset quality issues are. Similarly a 40% vacancy rate and a relatively high median rental rate also says a lot.

Much of the investment company exposure may be unrecoverable but (in theory at least" the RE lending should came back - but not unless demand catches up with supply - which it will not at current rental prices.

If anything, HSBC may be being optimistic.

The Rageful Cynic said...

me thinks rating agencies should wear their dismissals like a badge of honor....

Abu 'Arqala said...

TRC

Perhaps a page in the pitchbook?

Touting that you've been dismissed could however be a negative in a sales pitch to an Issuer.

Like the university, many students look for the professor with a reputation for being an easy grader. Or one with not too onerous course requirements.

Abu 'Arqala said...

LC2

You've hit the proverbial nail on the head.

The MEED article on real estate I referred to in an earlier post had an interesting thought. Property values were coming down faster than rental rates - making the yield attractive. The assumption being that real estate is on offer and that new buyers who step up could make a tidy profit.

I'm not sure that's the case. And that having bought a cheap building today one might find additional downward pressure on rental rates.

Especially with substantial new property coming on market.

I think there's a bit more to go before the bottom is hit.

Advocatus said...

S&P and Capital Intelligence terminated as part of cost cutting. Moodys and FitchRatings have been retained. There is no reason to have 4 agencies providing a rating but as you note it is very difficult to avoid the negative publicity when you do sever the relationship. If Commercial Bank wanted to avoid bad news surely it would have terminated earlier. I understand Commercial Bank are one of the better Kuwaiti banks in supplying the rating agencies with additional information not available in the financial statements on a quarterly basis. I know the Financial Controller of the bank had a final conference call with S&P as part of the termination process when 30th June NPLs and outlook were discussed.

Abu 'Arqala said...

Advocatus

Thanks.

I wasn't aware that Commercial Bank enjoyed that reputation.

Four rating agencies is a bit much. Besides the cost cutting was any of this Basel II / Basel III motivated. Remove the lower graders from the rating pool?

Anonymous said...

I agree with Advoctus: the motive behind the decision is cost cutting. Knowing some of the people there, to my surprise CBK's loan portfolio is the second best after NBK, its far better than KFH and Gulf. off course if you do not have a large portfolio, you do have a large bad loans, which is in the case with BKME : its nothing to ride home about. CBK has the second highst rating in Kuwait, the credit should go to the Xboard and Sr. Managment

Abu 'Arqala said...

Anonymous

Thanks.

But if CBK has 20% non performing and is second best, what do the other banks have?

Anonymous said...

I am not sure of the source of your 20% figure, but CBK has a pre invasion loan to Sudan, which is already been bought by the Government after the invasion.This is should not be counted. CBK has been more conservative than some of the other banks in taking provisions.

Anonymous said...

Also see your post below:
http://suqalmal.blogspot.com/2010/09/hsbc-no-provision-relief-for-kuwaiti.html:

Advocatus said...

Anonymous

Commercial Bank has the second highest NPLs of conventional Kuwaiti banks after Gulf Bank (ignore KFH it is islamic). At 31/12/2009 Gross NPL% was 17% the Post Lib NPL% was 14%.

The 20% comes from the S&P press release and despite their wording is probably very accurate as it will be based on the exit conference call with the bank.

I would not defend the xBoard (in particular the Chairman & MD) or CEO but very much blame them for the situation the bank is currently in.

Abu 'Arqala said...

Advocatus

Thanks for weighing in.

But your comment raises two intriguing questions.

Why ignore KFH? A bad loan is a bad loan even if made by good people.

Any thoughts on their NPLs?

Anonymous said...

Advoctus: thanks, but to be Fair, while the X-Board ,CMD and the CEO should be responsible for the Decisions on the loans, they should be given credit to make al-Tijari the second highest rated Bank in bank in Kuwait both so-Islamic and otherwise. See the 2009 annual report. Do not forget that its easy to be a Monday morning quarter back.

Advocatus said...

I ignore KFH in order to compare like with like. Normal peer group I follow is conventional banks. I also think Islamic Banking is a bit of a con as all the transactions I have seen use an interest rate as a reference for the "profit". I am a non believer.:-)

KFH 2009 NPLs as per their receivables note 7 are around 12% but around 16% if you use the Credit Risk note 28 quality numbers which brings in the NPLs for Leased Assets. Note 28 amount is higher because it includes items <90 days past due that are not impaired yet. They seem to have sufficent collateral against these facilities - but alot of it will be real estate and it will be interesting to see how much the valuation of collateral declines in 2010. (it might not - KFH is one of the recommended real estate valuation experts that conventional banks use so it may be able to skew the results in their favour).


I am surprised that anyone actually believes what is written in the annual report before the auditors opinion as they are generally PR only. 2009 annual report a swan song from someone on their way out trying to salvage their reputation?

Abu 'Arqala said...

Anonymous

Absent a political catastrophe (like Saddam's invasion of Iraq) or a macroeconomic collapse, when a bank winds up with 20% bad loans, the crew on watch (Board and Senior Management)properly have earned a distinguished place in the Bankers' Hall of Shame.

It's pretty clear who are the cowboys "up north". I've seen the financials for non listed companies where there is (a) leverage up to the gills, (b) no discernible cash flow, (c) largely imaginary asset values (against which the banks are merrily lending).

Among the larger banks, it always seemed quite a competitive race between AlTijari and AlKhalij to see who could do the stupidest thing.

With the "wise" derivatives transaction AlK seemed to have lapped AlT, but I guess the race is still on.

Abu 'Arqala said...

Advocatus

Thanks.

Some even have trouble believing a lot of what is after the auditors' report.

Other more cynical folks find they usually can rely on the page numbers being correct.

Anonymous said...

Advoctus : Thanks. From your earlier comment above: (I know the Financial Controller of the bank had a final conference call with S&P as part of the termination process when 30th June NPLs and outlook were discussed). It seems you have access to the Financial Controller of the Bank since this is considered confidential information, and was not reported in the press. May be you can ask him about other financial performance indicators of CBK and other inside information ,and not only the NPL numbers: perhaps you can hear Rock and Roll instead of the Swan Song.

Advocatus said...

Anonymous

It is not often I have "wasta" - the Financial Controller is a friend and he had been complaining about sitting late for the conference call with S&P. He did not mention the 20% NPL but I assumed that if S&P were quoting numbers they would be based on call with him.

What do you want to know and I will ask him next time I see him? :-)

Anonymous said...

Advoctus:
The poor chap “been complaining about sitting late for the conference call with S&P”, wow.

From your comments above you seems to be very knowledgeable about CBK and apparently you discuss more than his simple complain about staying late in the office. However you contradict yourself in the above comments: “ CBK has the second highest NPLs of conventional Kuwaiti banks after Gulf Bank (ignore KFH it is islamic). At 31/12/2009 Gross NPL% was 17% the Post Lib NPL% was 14%.”. Then you quote the 20% from SP. The 6% difference is about KD 15 million of the CBK loan portfolios.
As to whether I need anything to ask him, I have easy access to him and I am a CBK staff and have enough information to make my own professional judgment and look beyond one or two numbers. To conclude these discussions CBK financials are very strong and it’s a very good Bank, thanks to the X-Board CMD and CEO, I worked with them and I know their caliber. Of course you are entitled to your opinion and I fully respect it. Cheers!!!

Advocatus said...

Anonymous

The split between pre invasion and post liberation is available from the bank's 31/12/2009 financial statements Note 6. so is readily available.

All Kuwaiti banks disclose this in their annual financial statements so the comparison is fairly easy.

That disclosure is not available in the interim financials so I referred to the S&P 20%.

My opinion on the the ex Chairman and ex CEO is based mainly on the continuing loan and investment provisions.

Only Gulf Bank (due to its derivatives issue) and Commercial Bank seem to have an ongoing problem with this. NBK and Al Ahli seem to have avoided the worst, while Burgan seems to fall between these 2 groups.

That is not inside information but looking at the financials - after the auditors report!

If you do see the Financial Controller please ask him if there will be a dividend this year as he will not tell me.

Anonymous said...

By the way I asked the big Boss and he said there will be adividend distribution this year of around 30 to 35 fils. you should wait and see. No need to ask the cfo.

Advocatus said...

I think a bit of wishful thinking by the Big Boss.

A 30 fils cash dividend would require KD 38 million

A 35 fils cash dividend would require KD 44.5 million

Central Bank seems to be restricting dividend payout to less than 50% of net profit. So for Commercial Bank to distribute the 30/35 fils dividend they need to make profits of between KD 76 - 89 million for the last 6 months of 2010 which would be a stretch having made only KD 840,000 for the first 6 months.

Unless they manage to sell their Boubyan Bank shares as there is a nice profit on them - though not sure the profit would be available for distributuion as the shareholders approved passing it to TID at that general meeting in August 2009.

I think you should ask the CFO - you might get a more realistic answer :-)