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Fitch Affirms Boubyan Bank at 'A+'; Upgrades VR to 'bbb-'
October 16, 2017 / 3:57 PM / a month ago

Fitch Affirms Boubyan Bank at 'A+'; Upgrades VR to 'bbb-'

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed Boubyan Bank's (BBY) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. Fitch has also upgraded the bank's Viability Rating (VR) to 'bbb-' from 'bb+'. The VR upgrade reflects BBY's improving franchise, effective strategy implementation and higher-than-peers earnings and profitability. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, SUPPORT RATING, SUPPORT RATING FLOOR BBY's IDRs are support-driven. The Support Rating (SR) and Support Rating Floor (SRF) reflect an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in BBY's SR of '1' and SRF of 'A+', in line with Fitch's Domestic-Systemically Important Bank SRF. Fitch's expectation of support from the authorities is underpinned by Kuwait's strong ability to provide support to domestic banks, as reflected by the sovereign rating (AA/Stable) and a strong willingness to do so irrespective of the banks' size, franchise, funding structure and the level of government ownership. This view is reinforced by the authorities' track record of support for the domestic banking system in case of need. 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. Contagion risk among domestic banks is high (Kuwait is a small and interconnected market) and we believe this is an added incentive to provide state support to any Kuwaiti bank if needed, to maintain market confidence and stability. The Stable Outlook on BBY's Long-Term IDR reflects that on the Kuwaiti sovereign rating. We assign Short-Term IDRs according to the mapping correspondence described in our bank rating criteria. An 'A+' Long-Term IDR can correspond to a Short-Term IDR of either 'F1' or 'F1+'. In the case of BBY, we opted for 'F1', the lower of the two Short-Term IDR options. This is because a significant proportion of the Kuwaiti banking sector funding is related to the government and a stress scenario for the banks is likely to come at a time when the sovereign itself is experiencing some form of stress. VR BBY continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of low oil prices. The bank is exposed to lower economic growth, but Fitch believes that the government's continuing capital spending plans will partially offset the pressures. BBY has a moderate but growing franchise in Kuwait, underpinned by being part of the National Bank of Kuwait (NBK) group. BBY's domestic-led business model is supported by the bank's fintech-oriented retail offering, which underpins deposit collection. The bank has a competent management team that is highly experienced in local banking and includes managers previously employed by NBK. BBY's strategic objectives have proven to be consistent, sustainable and are articulated around domestic- and organic-led growth. Management has demonstrated an effective strategy implementation record despite high balance sheet growth. Fitch's assessment incorporates BBY's high risk appetite for domestic growth. BBY also remains highly concentrated by sector and single obligor. The bank is highly exposed to domestic real estate, a sector that can be volatile and has seen lower prices and sales in 2016 and 1H17. Fitch also factors in the benefits of BBY's adequate risk controls and management from the bank being part of the NBK group. BBY's financing-quality is resilient, with one of the lowest impaired financing ratios across the sector (0.6% at end-1H17) and very low problem financing generation. Reserve coverage continues to be high (although lower than peers) due to the prudent actions of the Central Bank of Kuwait requiring the build-up of precautionary reserves. Fitch believes this is necessary in light of the bank's significant concentration by sector and single obligor due to Kuwait's narrow economy. Concentrations and risk appetite will remain constraints on asset quality. BBY's profitability is stable and higher than peers' (annualised operating profit/risk-weighted assets ratio was 2.2% in 1H17). Growth supports earnings generation. Stable net special commission margins, cost-efficiency and impairment charges underpin the bank's profitability. The bank's earnings are primarily generated from net financing income and fees and commission from corporate and retail customers, predominantly real estate segments, and therefore would remain sensitive to domestic economic cycles. The bank's capital ratios compare well with peers'. The bank's fast growth and the implementation of Basel 3 have reduced capitalisation levels and buffers over minimum requirements. The risk absorption capacity of the bank's capital is adequate, supported by resilient asset quality. The bank's dividend pay-out ratio is lower than peers' and supports internal capital generation. Fitch believes that BBY has the capacity to raise capital if needed, with support from NBK. The bank successfully issued perpetual tier 1 sukuk for USD250 million in May 2016 to fund growth. Large concentrations will remain the main risk. Similar to peers, BBY's high reliance on wholesale funding (57% of customer deposits at end-1H17, albeit below peers') results in deposit concentration (the top 20 deposits represented 53% of total at end-1H17), primarily from government-related entities and large corporates. The deposit base has been historically stable, mitigating liquidity maturity mismatches. BBY's liquidity is well-managed and liquidity risk remains contained. The Fitch calculated financing/deposits ratio (89% at end-1H17) is stable and in line with peer average. Liquidity flexibility is underpinned by an adequate stock of liquid assets (20% of total assets and 24% of customer deposits at end-1H17). RATING SENSITIVITIES IDRs, SR, SRF BBY's IDRs, SR and SRF are sensitive to a change in Fitch's assumptions around the Kuwaiti authorities' propensity or ability to provide timely support to the banking sector or the bank. At present, we do not see much likelihood of a change. VR An improvement in BBY's franchise, sustainable financing growth without material asset-quality deterioration or a significant reduction of concentrations could be positive for the bank's VR. The VR is sensitive to continuing rapid financing growth leading to asset-quality deterioration or weakening capital ratios. The rating actions are as follows: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating upgraded to 'bbb-' from 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gilbert Hobeika Associate Director +44 20 3530 1004 Committee Chairperson Eric Dupont Senior Director +33 1 4429 91 31 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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