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Moody’s says BKME’s conversion into Islamic bank will not change ratings

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Points of Essence:

  • Bank of Kuwait and Middle East (BKME)’s planned conversion to Islamic banking will not change the Moody’s rating as it will tap a potential Islamic retail market in Kuwait as well as poise itself as the second largest Islamic bank.

By: Staff Writer

Moody’s believes that BKME could also reposition itself in its domestic market and potentially become the second-largest Islamic bank in Kuwait.

Moody’s Investors Service said that, having considered the pros and cons; it sees no grounds for changing the ratings of Bank of Kuwait and Middle East (BKME) solely as a result of the bank’s planned conversion from a conventional to an Islamic bank. BKME’s A1/Prime-1 long- and short-term local and foreign currency deposit ratings as well as its C- Bank Financial Strength Rating (BFSR) therefore remain unchanged.

Moody’s explains that BKME is one of a few conventional banks to have sought permission from the Central Bank of Kuwait (CBK) to fully convert its operations to become fully Shari’ah compliant. Permission was granted in June 2008 and Moody’s understands that the conversion process will be carried out in two stages.

During the first phase, which is expected to last approximately one year, the bank must put in place all necessary systems and processes to allow it to operate in accordance with Shari’ah. During the second stage, lasting around two years, the bank will fully convert its assets and liabilities. Moody’s noted that a conversion plan with milestones and timelines was recently submitted to the Central Bank of Kuwait. The bank has also established conversion working groups and appointed a lead consultant with sub-consultants either approved or short-listed.

“From a strategic perspective, this conversion would transform BKME into the Islamic banking conduit of its Bahraini domiciled parent, Ahli United Bank, with potentially significant benefits in light of the growing popularity of Islamic banking in the region,” says Stathis Kyriakides, an analyst at Moody’s Limassol office. Once the conversion is completed, Moody’s believes that BKME could also reposition itself in its domestic market and potentially become the second-largest Islamic bank in Kuwait.

As a large proportion of Kuwaitis are choosing Islamic banking, this conversion could also give BKME better access to the retail market segment, an area in which it has traditionally been weak, and support both its profitability and market share, both of which have been weakening in recent years.

“Nevertheless, the conversion plan means that the bank is entering a restructuring period and may face execution risk, including material conversion costs and elevated operational risks,” Kyriakides said. Moody’s said that BKME’s ability to address and manage this transition and the risks involved, while avoiding business disruption, will determine the need to make rating adjustments along the way.

Headquartered in Safat, Kuwait, the Bank of Kuwait and the Middle East reported total assets of $9.7 billion at the end of March 2008.

Source: cpifinancial.net

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Written by Suapi Shaffaii

July 15, 2008 at 4:17 am

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