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Fitch Affirms Warba Bank at 'A+'; Upgrades VR to 'bb-'
October 16, 2017 / 5:02 PM / 2 months ago

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

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed Warba Bank's (WB) Long-Term Issuer Default Rating (IDR) at 'A+'; the Outlook is Stable. Fitch has also upgraded the bank's Viability Rating (VR) to 'bb-' from 'b+'. The VR upgrade reflects WB's good strategy execution and improving earnings and profitability. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, SUPPORT RATING, SUPPORT RATING FLOOR WB's IDRs are support-driven. Its Support Rating (SR) and Support Rating Floor (SRF) reflect an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in WB's SR of '1' and 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 WB'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 WB, 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 WB 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. WB has a nominal but growing franchise in Kuwait, with a market share of about 2% by assets at end-1H17. The bank has established a corporate-oriented business model and benefits from close links to the state due to its large shareholding by government-related entities. The bank has a good management team, experienced in local banking. WB's strategic objectives have proven to be consistent, sustainable and articulated around domestic- and organic-led growth. Management has proven a good execution record despite high balance sheet growth. Fitch's assessment incorporates WB's higher risk appetite relative to domestic peers. WB also remains highly concentrated by sector and 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. Fitch also considers the bank's acceptable risk controls. WB's financing-quality is resilient, with one of the lowest impaired financing ratios across the sector (0.5% at end-1H17) and very low problem financing generation. 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. WB's profitability is lower than peers but has improved (the annualised operating profit/risk-weighted assets ratio was 0.7% in 1H17). The bank's tighter margins, higher cost/income ratio and impairment charges (relative to local peers) reflect its growth phase as the bank seeks to continue to build up its franchise. The bank's earnings are primarily generated from net financing income on real estate financing and therefore would remain sensitive to domestic economic cycles. The bank's fast growth and the implementation of Basel 3 have reduced capitalisation levels and buffers over minimum requirements. WB successfully issued a perpetual tier 1 sukuk for USD250 million in March 2017 to fund its growth and boost capital ratios. Fitch, however, considers that the bank's core capital ratios remain among the weakest of peers and the capital base is small. Internal capital generation is weak due to low profitability and despite no dividend payment. Fitch believes that a rights issue will be necessary to fund growth, especially as the bank has good access to capital through its strong core shareholders. Resilient asset quality supports the risk absorption capacity of the bank's capital. Large concentrations and growth remain the main risks. WB's high reliance on wholesale funding (91% of customer deposits at end-1H17, the highest in the sector) results in deposit concentration (the top 20 deposits represented 81% of the total at end-1H17), but the largest depositors are government-related entities and some large corporates that have proven to be stable, mitigating liquidity maturity mismatches. WB's liquidity is well managed and liquidity risk remains contained. The financing/deposits ratio (92% at end-1H17) is higher than peers due to a large focus on financing growth. Liquidity flexibility is underpinned by a reasonable buffer of liquid assets (16% of total assets and 19% of customer deposits at end-1H17). RATING SENSITIVITIES IDRs, SR, SRF WB'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 An upgrade of WB's VR would be contingent on further strengthening the franchise, improving earnings and profitability and reducing risk appetite in terms of growth and concentrations. Downside pressure on the VR would result from continuous rapid growth that may deteriorate asset quality and weaken capital ratios. 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 'b+' 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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