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Fitch Affirms Gulf Bank at 'A+'; Upgrades VR to 'bb+'
October 16, 2017 / 3:17 PM / 2 months ago

Fitch Affirms Gulf Bank at 'A+'; Upgrades VR to 'bb+'

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed Gulf Bank's (GB) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. Fitch has also upgraded the bank's Viability Rating (VR) to 'bb+' from 'bb'. The VR upgrade reflects GB's continuing strong strategy implementation and improving underwriting standards and asset quality. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, Support Rating and Support Rating Floor GB's IDRs are support-driven. Its Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view of an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in GB's SR of '1' and SRF of 'A+', in line with Fitch's Domestic-Systemically Important Bank SRF for Kuwait. 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' 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 GB'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 GB, 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 GB continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of low oil prices. The bank is exposed to slower economic growth, but Fitch believes that the government's continuing capital spending plans will partially offset the pressures. GB has an adequate franchise in Kuwait, both in retail and corporate banking. GB's large branch network and good brand support the bank's distribution capabilities. The bank's business model is domestic-led. The bank has a competent management team, which is highly experienced in local and regional banking, with an improving record of strategy implementation in Kuwait. The bank's strategic objectives are consistent and cautious. GB's VR factors in the bank's concentrations by sector and by single obligor. GB is exposed to domestic real estate (although this has declined), 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 and equities held as collateral for other lending. Fitch's assessment factors in cautious growth and limited market risk. GB's asset quality has continued to improve, albeit at a slow pace, undermined by non-performing legacy loans (the impaired loans ratio was 2.5% at end-2016; the ratio would have been about 1.5% if these legacy loans were excluded). Reserve coverage continues to be 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. GB's profitability is improving but remains below peers' (operating profit/risk weighted assets ratio was 1.2% in 2016). Net interest margins are stable and the bank has demonstrated good cost-efficiency and an ability to reduce impairment charges (although these remain higher than peers). Earnings and profitability remain highly sensitive to economic and interest rate cycles in Kuwait. GB's capital and leverage ratios are lower than peers'. The implementation of Basel 3 has reduced capitalisation levels and buffers over minimum requirements (the Fitch Core Capital ratio was 14.7% at end-2016). Fitch's assessment factors in GB's capacity to issue capital instruments to accompany growth. The risk absorption capacity of the bank's capital is adequate, supported by improving asset quality. Concentration will remain the main risk. Similar to peers, GB's high reliance on wholesale funding results in high deposit concentration. The deposit base has been stable, mitigating liquidity maturity mismatches. GB's liquidity is well-managed and liquidity risk remains contained. The loans/deposits ratio is stable and in line with peers. Liquidity flexibility is underpinned by a large stock of liquid assets (32% of total assets and 42% of customer deposits at end-1H17). RATING SENSITIVITIES IDRs, SR and SRF GB'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 GB's VR could be upgraded if single borrower concentration is significantly reduced and if asset quality overall improves. A change in the bank's current conservative expansion strategy, such as rapid growth, and weaker underwriting standards could negatively affect the VR. The rating actions are as follows: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating upgraded to 'bb+' 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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