October 16, 2017 / 3:32 PM / 8 months ago

Fitch Affirms Commercial Bank of Kuwait at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed Commercial Bank of Kuwait's (CBK) Long-Term Issuer Default Rating (IDR) at 'A+'; the Outlook is Stable. Fitch has also affirmed the bank's Viability Rating (VR) at 'bb'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, SUPPORT RATING, SUPPORT RATING FLOOR CBK's IDRs are support-driven. Its Support Rating (SR) and Support Rating Floor (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 CBK's SRF of 'A+', in line with Fitch's actual country Domestic-Systemically Important Bank SRF. Fitch's expectation of support from the authorities is underpinned by Kuwait's strong ability to provide support to its banks, as reflected by its rating (AA/Stable) and 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. There is high contagion risk among domestic banks (Kuwait is a relatively small and interconnected market). 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 Outlook on CBK's Long-Term IDR reflects the Stable Outlook 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 CBK, 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 CBK 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. CBK has a moderate franchise in Kuwait and a good presence in the corporate banking sector. CBK's brand and adequate branch network underpin the bank's distribution capabilities. The bank's business model is domestic-led. The bank has a competent management team, experienced in local and corporate banking. CBK has a consistent execution under its renewed and clearer strategy. CBK's VR considers the bank's concentrations by sector and by single obligor. CBK is exposed to domestic real estate, a sector that can be volatile and has seen lower prices and sales in 2016 and 1H17. The bank is directly and indirectly exposed to the equity market from share financing (for high net-worth individuals) and equities held as collateral for other lending. Fitch's assessment factors in cautious growth and limited market risk. CBK's impaired loans ratio has continued to improve (0.5% at end-1H17; below peers) as a result of write-offs. Reserve coverage continues to be very high due to the prudent actions of the Central Bank of Kuwait, requiring the build-up of precautionary general reserves. Fitch believes this is necessary in light of the bank's significant concentration by sector and by single obligor due to Kuwait's narrow economy. Concentrations will remain a constraint on asset-quality. CBK's profitability is improving and compares well with peers (operating profit/risk weighted assets ratio was 1.6% in 2016). Net interest margins are increasing and the bank has demonstrated good cost-efficiency (cost-to-income ratio was 29% in 1H17; lower than peers) and ability to reduce impairment charges (although these remain higher than peers). Fitch's assessment incorporates the large impairment charges registered for the legal case related to the Boubyan Bank shares. The bank's good non-interest income (fees and commissions represent 26% of operating income; higher than peers) supports earnings' stability. However, profitability will remain sensitive to economic and interest rate cycles in Kuwait. CBK's capital and leverage ratios are stable and above peers. The implementation of Basel 3 has slightly reduced capitalisation buffers over minimum requirements (the Fitch Core Capital ratio was 18.3% at end-1H17). The risk absorption capacity of the bank's capital is adequate, supported by the stable asset-quality. Concentrations will remain the main risk. Similar to peers, CBK's high reliance on wholesale funding (68% of customer deposits) results in deposit concentration (the top 20 deposits represented 54% of the total at end-1H17), primarily from government-related entities and large corporates. The deposit base has been historically stable, mitigating liquidity maturity mismatches. CBK's liquidity is well-managed and liquidity risk remains contained. The loans/deposits ratio is lower than peers (81% at end-1H17). Liquidity flexibility is underpinned by a large stock of liquid assets (41% of total assets and 57% of customer deposits at end-1H17). RATING SENSITIVITIES IDRS, SR, SRF CBK'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 consider there is much likelihood of any change. VR CBK's VR could be upgraded further if its company profile continues to improve, including further diversification of the franchise and business model, and a reduction in concentration. Downside pressure on the VR would arise from deterioration in asset quality and capitalisation metrics. The rating actions are as follows: Long-Term IDR: affirmed at 'A+'; Outlook Stable Short-Term IDR: affirmed at 'F1' VR: affirmed at '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. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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