Fitch Ratings has today affirmed Kuwait Real Estate Bank's ('KREB') ratings at Issuer Default. The Issuer Default, Short-term and Support ratings for KREB reflect extremely strong potential support from the Kuwaiti authorities, in case of need. This is based on the history of consistent support local banks have received from the Kuwaiti authorities through past systemic crises and the importance of Islamic banking in Kuwait.

The Individual rating reflects KREB's small size, adequate cost efficiency and satisfactory capitalisation. It also reflects its improving asset quality and the positive impact that the conversion into an Islamic bank is expected to have on its franchise and prospects.

Recent changes in the Kuwaiti banking law enabled KREB to apply for an Islamic banking licence, allowing it to re-launch itself and operate on an unrestricted basis in a market that currently has only one major player. Approval for KREB's conversion to Islamic banking has been given by the Central Bank of Kuwait and the process is expected to be completed in Q207 upon government approval. Currently, KREB operates under a restricted banking licence permitting lending for real estate purposes only. This means KREB has difficulty in competing with local commercial banks, which can offer better pricing due to their larger scales and wider product ranges.

KREB's profitability is adequate but continues to lag its local peers' partly due to expenses related to the conversion, higher funding costs and fewer economies of scale. In anticipation of the conversion, new business has been subdued and non-Shari'ah compliant business has been run down, reflected in a 30% decrease in operating profit to KWD8m in 9M06 y-o-y, and a 9% contraction of the loan book in 9M06. Asset quality improved but remains weaker than the bank's peers. Impaired loans were around 13% of gross loans at end-9M06, with impairment reserves coverage of 54% low by regional standards but reflecting relatively higher levels of collateral held. Capitalisation is satisfactory, with a Tier 1 ratio of 25.8% at end-9M06. Capital ratios benefited modestly from Basel II implementation at end-2005.

Established in Kuwait in 1973, KREB has domestic market shares of around 3% in loans and deposits. Upon conversion into an Islamic bank, it plans to expand from its current seven branches to over 20 and offer a full range of Islamic retail and commercial banking products.