Today's rating action is driven by continued asset-quality pressures and subsequent high provisioning requirements, which are straining Commercial Bank of Kuwait's profitability. The stable outlook takes into account the bank's adequate capitalisation, solid liquidity and stable funding base, which Moody's expects will counterbalance the impact of further asset-quality and profitability pressures.

A full list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

Moody's says that today's rating action reflects:

(1) the continued asset-quality pressures; and

(2) the resulting burden on profitability arising from elevated provisioning charges.

--DETERIORATING ASSET QUALITY--

The main driver of today's rating action is the ongoing pressure on Commercial Bank of Kuwait's asset quality, primarily driven by its high exposure to the construction and real estate and investment sectors (approximately 40% of its loan portfolio as of YE2011). While a portion of the loans to these sectors had been restructured in 2008 and 2009, Moody's understands that a number have recently become non-performing. This reflects a slower-than-expected recovery in Kuwait's non-oil private sector economy, as a political stalemate between the elected parliament and the Emiri-appointed government has delayed spending on infrastructure projects.

Despite write-offs of KWD30.5 million in the first half of 2012 (1.3% of gross loans), Moody's notes that the bank's non-performing loan (NPL) ratio edged higher to 7.0% as of June 2012 (YE2011: 6.7%). Moreover, although the bank does not publish quarterly NPLs figures, Moody's notes that the increase in specific loan loss provision charges to KWD54.5 million for the nine months to September 2012, compared to KWD23.5 million booked in the first half of the year, signals a further intensification of asset-quality pressures in Q3 2012.

Moody's expects that problem loan formation will taper in 2013, but remain elevated overall, which will continue to require high provisions in the coming quarters as specific provision coverage also remains low.

-- EXTENDED PERIOD OF DEPRESSED PROFITABILITY --

Moody's notes that the high provisioning charges arising from the abovementioned asset-quality pressures continue to weigh on the profitability of Commercial Bank of Kuwait. The bank booked a KWD12 million loss (equivalent to a -0.45% return on assets) for the first nine months of 2012, with rising loan loss provisions representing 69% of pre-provision income, while securities impairment charges and other provisions accounted for a further 49% of pre-provision income. High provisioning charges have depressed Commercial Bank of Kuwait's profitability for the fourth consecutive year (in 2011 the bank booked a marginal profit of KWD853,000), thereby constraining the bank's internal capital generation capacity.

Although Moody's expects a gradual recovery in the bank's profitability metrics as problem loan formation eases off in 2013, profitability will remain under pressure at least into the first half of 2013 as provisioning needs remain high. Specific provision cover stood at a low 30% of NPLs as of June 2012 and likely declined further in Q3 2012.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on Commercial Bank of Kuwait's ratings reflect the bank's adequate capitalisation, solid liquidity and stable funding base, which Moody's expects will help to counterbalance the overall impact of additional asset-quality and profitability pressures. With a tier 1 capital adequacy ratio of 15.9% (as at June 2012), the bank's capitalisation constitutes a sufficient buffer to absorb likely asset-quality-related losses over the coming 18 months, which is consistent with its assigned rating. Similarly, solid liquidity and a stable funding base also continue to underpin the bank's capacity to withstand shocks.

WHAT COULD MOVE THE RATINGS UP/DOWN

In light of today's downgrade, upwards pressure on the ratings is currently limited. Over the longer term, once asset-quality improves substantially and no longer poses a threat to profitability and capitalisation, reduced balance-sheet concentrations could result in upward pressure on ratings. Geographic and revenue diversification and/or higher domestic market penetration that significantly enhance long-term income generating capacity, and the bank's franchise, could also exert upward rating pressure.

As indicated by the stable outlook, Moody's does not currently see further downward pressure on Commercial Bank of Kuwait's ratings. However, downward ratings pressure could emerge going forward if problem loan formation continues to increase beyond current expectations and threatens to compromise the bank's capitalisation or its market position.

LIST OF AFFECTED RATINGS

- Local-currency deposit ratings downgraded to A3/Prime-2 from A2/Prime-1

- Foreign-currency deposit ratings downgraded to A3/Prime-2 from A2/Prime-1

- Standalone bank financial strength rating affirmed at D+, with the standalone credit assessment lowered to ba1 from baa3

- The outlook on all ratings is stable

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Kuwait City, Kuwait, Commercial Bank of Kuwait had total assets of KWD3.6 billion as per its unaudited IFRS September 2012 financials.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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