October 16, 2017 / 4:32 PM / a year ago

Fitch Affirms National Bank of Kuwait at 'AA-'; Downgrades VR to 'a-'

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed National Bank of Kuwait's (NBK) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook. Fitch has also downgraded NBK's Viability Rating (VR) to 'a-' from 'a' in a reassessment of the bank's financial metrics, in terms of ratios (especially profitability and capitalisation) and absolute values (especially total assets, loans, deposits and equity) against regional peers with similar ratings. The downgrade also reflects the bank's increased non-investment grade securities book relative to equity, as well as unhedged foreign currency risk from foreign subsidiaries. A full list of rating actions is at the end of this rating action commentary. Fitch has also affirmed subsidiary National Bank of Kuwait (International)'s (NBKI) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR - NBK and NBKI Similar to all Kuwaiti banks, NBK'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 NBK's SRF of 'AA-' is one notch above Fitch's Domestic-Systemically Important Bank (D-SIB) SRF of 'A+' for Kuwait given the bank's unique status and systemic importance as the flagship bank in Kuwait, and its close business and strategic links with the state. 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), combined with Fitch's belief of a strong willingness to do so. 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 NBK's Long-Term IDR reflects that on the Kuwaiti sovereign rating. NBKI's IDRs are equalised with those of parent bank NBK. NBKI's Support Rating of '1' reflects an extremely high probability of support from NBK, given that the bank is a key and wholly-owned subsidiary of the group and based in a strategic market. VR - NBK NBK continues to benefit from a fairly stable operating environment in Kuwait 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 NBK's exposure to developed markets such as western Europe and North America, but also to more challenging ones regionally such as Egypt and Bahrain. Despite its geographical diversification, NBK still generates more than 75% of its operating income in Kuwait and its core funding is still reliant on Kuwaiti wholesale depositors. NBK is the flagship bank in Kuwait. It has leading market shares in Kuwait (about 34% by assets). The bank's size, large branch network, distribution capabilities, strong client relationships, expertise, brand, reputation and long-established geographical footprint provide NBK with clear competitive advantages. NBK is the only Kuwaiti bank to be able to provide both conventional and Islamic banking (through its 58.3%-owned Sharia-compliant bank Kuwaiti subsidiary, Boubyan Bank; A+/Stable/bbb-). NBK has a strong and highly experienced management team that supports the bank's effective strategy implementation. The bank's strategic objectives have been consistent over the past years and well-articulated to achieve organic growth and group integration. NBK benefits from a diversified business model, wider opportunities and larger size to reduce concentrations compared with domestic peers. However, concentrations by sector and single obligor remain high by international standards. 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. NBK also remains directly and indirectly exposed to the equity market from share financing (for high net-worth individuals) and equities held as collateral for other lending. A large part of big-ticket items are to prominent Kuwaiti family-owned groups that dominate the private sector and to regional / international businesses. NBK is exposed to international markets through subsidiaries. Risk control and reporting tools are satisfactory across the group and can support growth. Market risk is well-managed and controlled, but challenging markets such as Egypt and Bahrain create pressures on asset quality. NBK has a record of low impaired loans (about 1.2% of gross loans at end-1H17) and problem loans. The bank's leading franchise and diversified business model enable NBK to underwrite high-quality borrowers. The bank has healthy reserve coverage (372% of impaired loans and 4.6% of gross loans at end-1H17), in line with peers, but necessary in light of its concentrations. NBK's profitability is stronger than peers' in terms of generation capabilities, diversification and stability. This is due to stable net interest margins, better cost-efficiency (including cost optimisation across the group) and stable loan impairment charges (LICs). The bank's operating income is mainly generated in Kuwait (more than 75%) and from net interest income (77%) and therefore may be variable over economic or interest rate cycles although they have proven to be stable. NBK's Fitch Core Capital (FCC) ratio has improved and was in line with peers' at end-1H17 due to a KWD137.6 million rights issue in 2016 and continuous internal capital generation. Successful issuances of tier 1 (USD700 million) and tier 2 (KWD125 million) instruments in 2015 have supported Fitch's view on the bank's high ability to raise capital and boost regulatory ratios to adhere to additional D-SIB capital requirements. NBK's high reliance on wholesale funding results in deposit concentrations that, although below peers', remains high by international standards. These deposits are primarily sourced from the government, quasi-government entities and large corporates that have proven to be stable, mitigating liquidity maturity mismatches. The recent five-year senior unsecured debt issue of USD750 million has supported NBK's funding. The bank's liquidity is well-managed and liquidity risk remains contained. The financing/deposits ratio (84% at end-1H17) is lower than peers, and liquidity flexibility is underpinned by a large stock of liquid assets (33% of total assets and 47% of customer deposits at end-1H17), offsetting the bank's net interbank borrowing position. SENIOR DEBT - NBK The rating of NBK's senior unsecured commercial paper is in line with the bank's Short-Term IDR of 'F1+'. The senior debt ratings of NBK SPC Limited, a special purpose vehicle (SPV) wholly owned by NBK, are aligned with the bank's IDRs. Fitch believes that NBK will support the senior debt issued by the SPV if required. RATING SENSITIVITIES IDRS, SR, SRF - NBK and NBKI NBK'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 NBK's status as the flagship bank in Kuwait. At present, we do not see much likelihood of a change. NBKI's ratings are sensitive to a change in NBK's ratings. They are also sensitive to a change in Fitch's view of the importance of this subsidiary to NBK. VR - NBK A further diversification in NBK's loans, deposits and operating income could be positive to the bank's VR. However, Fitch does not see much likelihood of a change in the short term. NBK's VR could be downgraded if the FCC ratio comes under renewed pressure and the bank is unable to reduce its concentration risks. SENIOR DEBT - NBK The senior debt ratings of are subject to the same sensitivities as NBK's IDR. The rating of NBK's senior unsecured commercial paper is sensitive to a change in the bank's Short-Term IDR . The rating actions are as follows: National Bank of Kuwait: Long-Term IDR affirmed at 'AA-'; Outlook Stable Short-Term IDR affirmed at 'F1+' Viability Rating downgraded to 'a-' from 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'AA-' Commercial Paper affirmed at 'F1+' NBK SPC Limited: Senior unsecured affirmed at 'AA-'/'F1+' NBK (International): Long-Term IDR affirmed at 'AA-'; Outlook Stable Short-term IDR affirmed at 'F1+' Support Rating affirmed at '1' 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: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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