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Fitch Affirms Kuwait International Bank at 'A+'; Outlook Stable
October 16, 2017 / 3:47 PM / a month ago

Fitch Affirms Kuwait International Bank at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed Kuwait International Bank's (KIB) 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 KIB'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 KIB'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 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 KIB'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 KIB, 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 KIB 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 such pressures. KIB has a nominal but growing franchise in Kuwait, with a market share of about 3% by assets at end-1H17. The bank has a corporate-oriented business model, with a particular focus on commercial real estate. The bank has a new and experienced management team. Fitch views this as necessary to execute the bank's new strategy set out in 2015. Fitch's assessment incorporates KIB's high risk appetite for domestic growth. KIB also remains highly concentrated by sector and by 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. KIB's asset quality has been volatile. In 2015, asset quality improved due to the write-off of a large legacy and fully provisioned impaired financing, as well as due to a more conservative approach to financing and risk appetite of the new management team. This has stabilised the impaired financing ratio for two years. In 1H17, the impaired financing ratio highly increased (to 5.2% at end-1H17 from 1.5% at end-2016). This is symptomatic of a concentrated underwriting profile, with relatively large financing tickets. 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. KIB's profitability is relatively volatile and sensitive to impairment charges (the annualised operating profit/risk weighted assets ratio was 1.8% in 1H17; above peer average). The declining net financing margins due to competition reasons and an increasing cost/income ratio (50% in 1H17; the highest in the sector) undermine the bank's profitability. Earnings and profitability remain highly sensitive to economic and interest rate cycles in Kuwait. KIB's capital and leverage ratios are above peers (FCC ratio was 19.4% at end-1H17). The bank's fast growth and the implementation of Basel 3 have reduced capitalisation levels and buffers over minimum requirements, but remain above peers. Large concentrations and growth remain the main risks. KIB's high reliance on wholesale funding (82% of customer deposits; one of the highest in the sector) results in deposit concentration (the top 20 deposits represented 63% 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. KIB's liquidity is well managed and liquidity risk remains contained. The gross financing/deposits ratio (93% at end-1H17) is higher than peers. Liquidity flexibility is underpinned by a good stock of liquid assets (24% of total assets and 31% of customer deposits at end-1H17). RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR KIB'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 Upside for KIB's VR could come from further improvement in the company profile, franchise and risk appetite, in addition to stabilised asset quality metrics. 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. 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#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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