October 16, 2017 / 3:02 PM / a year ago

Fitch Affirms Kuwait's Burgan Bank at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed Kuwait-based Burgan Bank's (BB) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. The bank's Viability Rating (VR) has also been affirmed 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 BB's IDRs are support-driven. The Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view of an extremely high probability of support from the Kuwaiti authorities to all domestic banks if needed. This is reflected in the 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' 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 BB's Long-Term IDR reflects that on the Kuwaiti sovereign rating. We assign Short-Term IDRs according to the mapping correspondence described in our rating criteria. An 'A+' Long-Term IDR can correspond to a Short-Term IDR of either 'F1' or 'F1+'. In the case of BB, 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 BB continues to benefit from a fairly stable operating environment in Kuwait (48% of BB's credit exposures at end-2016) despite the economic impact of low oil prices. Kuwaiti banks are exposed to slower economic growth, but Fitch believes that the government's continuing capital spending plans will partially offset the pressures. Our assessment of the operating environment factors in BB's exposure to challenging regional markets such as Turkey (18%), Algeria (7%), Iraq (3%), Jordan (1%) and Tunisia (negligible exposure). BB has an adequate franchise in Kuwait, underpinned by regional expansion. The bank's local and regional network and brand underpin BB's distribution capabilities, and support revenue generation, including cross-border businesses, but also deposit collection. The bank has a strong management team, highly experienced in local and regional banking. BB's strategic objectives are consistent, balancing between domestic and regional/ international growth to achieve higher returns. However, execution is sensitive to economic cycles in less stable markets. Fitch's assessment incorporates BB's high risk appetite for regional and international expansion. BB also remains concentrated by sector and single obligor. 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. BB is also exposed to domestic real estate, a sector that can be volatile and has seen lower prices and sales in 2016 and 1H17. Fitch's assessment incorporates BB's high exposures to related parties. Volatile growth and heightened market risk originating from the regional expansion undermine risk controls. BB's VR incorporates that the bank's asset quality that is weaker than peers, with a slight increase in impaired loans ratio (4.5% at end-1H17, higher than peers). However, the bank's problem loans generation is low. Reserve coverage of impaired loans (118% at end-1H17) is lower than peers due to lower reserve requirements outside Kuwait but reserve coverage of gross loans is in line with peers. Fitch believes that high reserve coverage is necessary in light of the bank's significant concentration by sector and single obligor, and exposure to more challenging markets outside Kuwait. Concentrations and risk appetite will remain constraints on asset-quality. BB's high net interest margins (due to exposures to higher-yielding assets) and relatively stable impairment charges have supported the bank's profitability (annualised operating profit/risk weighted assets was 1.73% in 1H17). BB has one of the highest cost-to-income ratios among peers. The bank's profitability remains exposed to volatility risks, including impairment charges, especially in more unstable operating environments outside Kuwait. BB's capitalisation ratios are below peers' (the Fitch Core Capital ratio was 11.6% at end-1H17). The bank's regional expansion and the implementation of Basel 3 have reduced capitalisation levels and buffers over minimum requirements. Fitch's assessment factors in BB's capacity to issue capital instruments to fund further growth. Regional expansion and concentrations will remain the main risks. Similar to peers, BB's high reliance on wholesale funding (70% of customer deposits) results in high deposit concentration, primarily from government-related entities and large corporates. The deposit base has been historically stable, mitigating liquidity maturity mismatches. The successful issuance of subordinated tier 2 instrument of KWD100 million and senior unsecured bonds of USD500 million in 2016 supported BB's funding. BB's liquidity is well-managed and liquidity risk remains contained. The loans/deposits ratio is increasing and higher than peer average. Liquidity flexibility is underpinned by a large stock of liquid assets (28% of total assets and 41% of customer deposits at end-1H17), offsetting the bank's net interbank borrowing position. SENIOR DEBT The bank's EMTN programme and notes issued under the programme via Burgan Senior SPC Limited (100%-owned subsidiary) are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. RATING SENSITIVITIES IDRs, SR, SRF BB'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 BB's VR could be upgraded on a sustained improvement in the bank's capital ratios commensurate with the bank's risk profile, as well as a significant fall in related-party lending. The VR could be downgraded if capital ratios or asset quality weaken. SENIOR DEBT The senior debt rating of Burgan Senior SPC Limited is sensitive to changes in BB's IDRs. The rating actions are as follows: Burgan Bank: 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+' Burgan Senior SPC Limited: Senior unsecured affirmed at 'A+'/'F1' 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. 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