November 20, 2014 / 7:58 PM / 3 years ago

Fitch Ratings Affirms 9 Kuwaiti Banks

(The following statement was released by the rating agency) LONDON, November 20 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDR) of National Bank of Kuwait (NBK), Kuwait Finance House (KFH), Gulf Bank (GB), Commercial Bank of Kuwait (CBK), Al Ahli Bank of Kuwait (ABK), Ahli United Bank (Kuwait) (AUBK), Kuwait International Bank (KIB), Industrial Bank of Kuwait (IBK), Boubyan Bank (Boubyan) and NBK's UK-based wholly owned subsidiary National Bank of Kuwait (International) Plc (NBKI). A full list of rating actions is at the end of this rating action commentary. The rating actions follow Fitch's periodic peer review. KEY RATING DRIVERS - IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS The Kuwaiti banks' IDRs, Support Ratings (SR) and Support Rating Floors (SRF) reflect Fitch's view that there is an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in the SR of '1' and the SRF of 'A+' for all rated banks (apart from NBK) irrespective of their size, franchise, funding structure and the level of government ownership. NBK is assigned a SRF one notch higher at 'AA-' given its unique status as the flagship bank in Kuwait, its historical role in the domestic banking sector and close business and strategic links with the state. Fitch's view of sovereign support is based on Kuwait's financial strength as indicated by its rating (AA/Stable), in addition to the authorities' extremely strong propensity, in the agency's view, to support the domestic banking system, as has been clearly demonstrated over the years. The Central Bank of Kuwait operates a strict regime with hands-on monitoring to ensure the viability of the banks, and has acted swiftly in the past to provide support where needed; as in the case of GB. There is high contagion risk among domestic banks (Kuwait is a relatively small and interconnected market) and we believe this is an added incentive to provide state support to any Kuwaiti bank if needed, in order to maintain market confidence and stability. The Stable Outlooks on the banks' IDRs reflect the Outlook on the Kuwaiti sovereign rating. NBKI's IDRs are equalised with NBK's. Its Support Rating of '1' reflects an extremely high probability of support from NBK, given that the bank is a core subsidiary of the group, in Fitch's view. RATING SENSITIVITIES - IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS The Kuwaiti banks' IDRs, SRs and SRFs are potentially sensitive to a change in Fitch's assumptions around the Kuwaiti authorities' propensity to provide timely support to the banking sector, or any downward action on the sovereign rating. At present, we do not consider there is much likelihood of any change. NBKI's IDRs are sensitive to a change in NBK's ratings. They are also sensitive to a change in Fitch's view of the importance of this subsidiary to NBK. KEY RATING DRIVERS - VR The stable and supportive operating environment in Kuwait has a moderate influence on the banks' VRs. We note that government spending on infrastructure projects is picking up and generating growth opportunities, mainly in corporate banking. However, any material impact on the wider economy (like in other GCC states) is likely to take longer than the rating horizon. Asset quality continues to improve across the sector. NPL ratios have come down due to a clean-up of loan books and reserve coverage is high. Nevertheless Kuwaiti banks remain vulnerable to concentration risk by both sector and borrower. We believe borrower concentration risk in particular is a key risk for many banks given their high exposure to prominent Kuwaiti family-owned groups which dominate the private sector. We note that certain loans appear to be 'name lending', continually refinanced at maturity and repayment is primarily contingent on the sale of assets owned by these groups. Overall, Fitch finds that transparency and disclosure relating to these loans for many banks to be extremely poor. The other area of potential risk is that banks are directly and indirectly exposed to the stock market from share-related lending and shares taken as collateral. Sector concentration risk also arises mainly from real estate finance which is highly cyclical and prone to asset bubbles. NBK's company profile has a higher influence on its VR, reflecting its flagship status and dominant franchise, supported by a sound, diverse business model, which has been enhanced by the acquisition of Islamic banking subsidiary, Boubyan. NBK's VR also reflects a strong funding and liquidity profile, consisting of significant and stable government deposits and a large portfolio of government securities. Fitch views NBK's status as the flagship bank in the sector as further benefiting its funding profile, with priority access to state-related deposits as required. The VR further considers high borrower concentration risk (some of which is to finance investments) which weighs negatively on the bank's high VR. Boubyan's VR reflects its limited, but growing franchise in Kuwait. The bank's company profile has a high influence on its VR as it derives significant operational benefits, as well as business generation from its parent, NBK. The risk appetite also has a high influence on the VR given its strategy of fast growth. The VR also considers sound capitalisation and asset quality metrics, particularly as legacy problem loans were resolved in 2008. KFH's asset quality has a high influence on the VR. KFH has identified and is resolving its legacy problem loans. Fitch expects asset quality to improve, with the NPL ratio beginning to decline. As a leading retail bank, KFH has low levels of borrower concentration, making it less susceptible to event risk. Other positives include KFH's leading Islamic franchise and strong funding profile given its high proportion of retail deposits. In addition, the bank's efforts to restructure and streamline its business, and strengthen and integrate risk management, underpin the rating. GB's asset quality is a key driver of the VR, reflecting the bank's legacy loan quality problems and relatively high loan concentration by borrower. The bank's management has made substantial improvements to loan quality since 2009 but the process is gradual and its legacy issues will require time to work through. CBK's management has a high influence on its VR, particularly due to delays in executing its strategy. Its performance is viewed as moderate due to weak operating earnings and profitability owing to high loan impairment charges in the past. This was due to a previously high risk appetite, although we believe it is improving. The rating also considers CBK's lower level of impaired loans following substantial NPL write-offs, and acceptable liquidity and capitalisation. AUBK's VR reflects higher concentration risk on both sides of the balance sheet than peers, and in that context, lower capitalisation compared with peers. It also reflects healthy profitability metrics (among the strongest in the sector) and sound liquidity. Furthermore, asset quality indicators typically outperform the sector and have remained relatively stable in recent years. The VR also takes into account the strategic and operational benefits of being part of the Ahli United Bank Group. ABK's VR reflects the bank's modest franchise and asset quality, which, although broadly in line with peers, has fluctuated over the past few years. It also considers the bank's good capital position, healthy impairment reserve coverage and resilient earnings generation. KIB's VR reflects the bank's weak, but improving franchise and evolving strategy, high exposure to the real estate sector in Kuwait (albeit reducing as a percentage of gross financing through expansion and diversification in other economic sectors), lower coverage levels, and fairly high turnover of senior management over the past few years. The VR also reflects the bank's satisfactory liquidity profile and acceptable capital ratios. IBK's VR is highly influenced by its company profile, reflecting its development role in Kuwait. Given IBK's mandate, its risk profile is different to that of the commercial banks. Funding and liquidity also has a high influence on its VR as the majority of IBK's funding is in the form of a 20-year subordinated loan from the Kuwaiti government, maturing in 2027. RATING SENSITIVITIES - VR Given NBK's high VR, upside is unlikely. Downside risk may arise from the bank not reducing its concentration risk, which weighs negatively on both NBK's asset quality and capitalisation. An improvement in Boubyan's franchise in conjunction with sustainable lending growth could be positive for the bank's VR. The VR is sensitive to continuing rapid loan growth, which if not managed prudently, could impact future asset quality. Upside potential to KFH's VR would require improvement in asset quality in line with the bank's on-going restructuring plan. Downside pressure on the VR could result from significant weakening of asset quality and/or higher than expected impairment of the bank's equity investments resulting in weaker capitalisation. GB's VR could be upgraded if its single name concentrations were reduced significantly, leading to better asset quality. A change in the bank's current conservative expansion strategy and underwriting standards could negatively affect the VR. Upside potential for CBK's VR would require a successful execution of strategy leading to sustained financial performance. It would also require more diversification in the loan portfolio and normalised impairment charges. Downside pressure on the VR would arise from any delay in the current strategy being deployed. AUBK's VR could face downward pressure if there was a significant deterioration in asset quality due to event risk arising from its borrower concentrations. Upside potential is limited, in view of concentration risks and the bank's relatively limited franchise. ABK's VR could be upgraded with growth in its franchise. Downside pressure on the VR would result from weaker asset quality leading to weaker capital ratios. KIB's VR could be upgraded with management executing on its new strategy leading to improvement in its franchise, risk appetite and asset quality. Downside pressure on the VR could arise from weaker asset quality and capitalisation, particularly if Kuwait were to suffer a stress in the real estate sector. IBK's VR could be upgraded if there were a significant strengthening of the bank's company profile, particularly if government spending picks up. A loss of its government funding, although highly unlikely, would lead to a downgrade. The rating actions are as follows: National Bank of Kuwait: Long-term IDR affirmed at 'AA-'; Outlook Stable Short-term IDR affirmed at 'F1+' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'AA-' Commercial Paper affirmed at 'F1+' National Bank of Kuwait (International) Plc: Long-term IDR affirmed at 'AA-'; Outlook Stable Short-term IDR affirmed at 'F1+' Support Rating affirmed at '1' Boubyan Bank: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Kuwait Finance House: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Gulf Bank: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Commercial Bank of Kuwait: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Industrial Bank of Kuwait: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Al Ahli Bank of Kuwait: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Ahli United Bank (Kuwait): Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Kuwait International Bank: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'b+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Contact: Primary Analyst Mahin Dissanayake (CBK, KFH, GB, ABK, KIB, IBK NBK, NBKI and Boubyan) Director +44 20 3530 1618 Fitch Ratings Limited 30 North Colonnade London E14 5GN Primary Analyst (AUBK) Laila Sadek Director +44 20 3530 1308 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst (CBK, KFH, GB, ABK, KIB, IBK) Patrick Breen Analyst +44 20 3530 1645 Secondary Analyst (NBK, NBKI and Boubyan) Andrew Parkinson Associate Director +44 20 3530 1420 Secondary Analyst (AUBK) Karim Soueissi Associate Director +971 4 424 1240 Committee Chairperson Eric Dupont Senior Director +33 1 4429 9131 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014 2012 and 'Evaluating Corporate Governance' dated 12 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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