Analyzing Kuwaiti Banks Credit Ratings: Are They Overrated?

Abstract

After the 2008 global financial crisis, credit rating agencies were criticized for not doing their job properly resulting in billions of dollars in losses for investors that relied on these agencies ratings. The three main rating agencies (CRA's) Standard & Poor’s, Fitch, and Moody’s, assigned high credit ratings for companies such as Lehman Brothers, AIG, and many others which proved to be incorrect. This study examines the credit rating for Kuwaiti banks over the period spanning from 2013 to 2017 and compare them to the calculated rating based on Altman’s Z-score model. The study also examines the difference in credit rating between Islamic and conventional banks. Results obtained from this study showed that Kuwaiti banks, under Altman's Z-score model, were overrated and are vulnerable to any short-term financial shocks. The study also showed that Fitch gave a higher rating to Kuwaiti banks than the other rating agencies, which explains their domination over the credit rating market of Kuwaiti banks. In addition, the outcome of the study showed that Islamic banks had a higher credit rating average compared to conventional banks based on agencies credit rating and the same rating when it came to calculated rating. The end result of this paper shows that Altman's z-score model, despite being useful model in comparing banks on a local scale, does not take external economical and political factors into consideration when assigning the rating which makes the model inapplicable for comparing the financial strength between banks globally.