October 18, 2016 / 3:56 PM / a year ago

Fitch Affirms 11 Kuwaiti Banks; Upgrades 2 VRs; Outlooks Stable

(The following statement was released by the rating agency) DUBAI/LONDON, October 18 (Fitch) Fitch Ratings has affirmed National Bank of Kuwait's (NBK) Long-Term Issuer Default Rating (IDR) at 'AA-'. Fitch has also affirmed the Long-Term IDRs of Kuwait Finance House (KFH), Gulf Bank (GB), Burgan Bank (Burgan), Commercial Bank of Kuwait (CBK), Al Ahli Bank of Kuwait (ABK), Ahli United Bank (Kuwait) (AUBK), Kuwait International Bank (KIB), Industrial Bank of Kuwait (IBK), Boubyan Bank (Boubyan) and Warba Bank (Warba) at 'A+'. The Outlooks are Stable. Fitch has upgraded CBK's and KIB's Viability Ratings (VR) to 'bb' (from 'bb-') and 'bb-' (from b+), respectively, due to their improving financial profiles following the successful execution of strategic objectives and business reorganisation. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT The Kuwaiti banks' IDRs are support-driven. Their Support Ratings (SRs) and Support Rating Floors (SRFs) 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 the SRF of 'A+' for all rated banks (apart from NBK) irrespective of their size, franchise, funding structure and the level of government ownership. NBK's SRF is one notch higher at 'AA-' given its unique status and systemic importance as the leading bank in Kuwait, and 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 that it would have a strong willingness to do so. 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. There is high contagion risk among domestic banks (Kuwait is a relatively small and interconnected market) and 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 Outlooks on the banks' Long-Term IDRs reflect the Stable Outlook on the Kuwaiti sovereign rating. VR The Kuwaiti banks continue to benefit from a fairly stable operating environment despite the economic impact of low oil prices. The 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 environments of ABK and Burgan, also considers their exposure to more challenging markets regionally. Asset quality continues to improve due to loan write-offs, recoveries and for some banks restructuring. Reserves for NPLs continue to be extremely high due to the prudent actions of the Central Bank, requiring the build-up of precautionary general provisions. We believe high reserve coverage is required due to banks' significant concentration by sector and borrower due to Kuwait's narrow economy. A large part of these exposures are to prominent Kuwaiti family-owned groups that dominate the private sector. Some of these loans appear to be name lending and backed by equities. Corporate governance regulations are slowly improving, but Fitch finds that transparency and disclosure relating to the banks' largest credit exposures remain weak. Many banks remain directly and indirectly exposed to the equity market from share financing (for high net-worth individuals) and equities held as collateral for other lending. The banks are also highly exposed to domestic real estate, a sector that can be volatile and has seen lower prices and sales in 2016. NBK, Burgan, KFH and ABK are exposed to international markets through subsidiaries. NBK has strengthened regulatory capital through a rights issue and by issuing additional Tier 1 securities and subordinated bonds. Consequently, its regulatory capital ratios and Fitch Core Capital (FCC) ratio have improved to a level that no longer puts pressure on its VR. NBK's VR is underpinned by its flagship status and dominant franchise, which supports it revenue generation capacity and ability to finance better quality assets than peers. The rating also factors in the bank's strong management, consistent strategy and solid funding profile, benefiting from large, diverse and stable government related deposits. High borrower concentration places considerable pressure on the bank's risk appetite and asset quality. Boubyan's VR reflects its limited, but growing retail-led franchise in Kuwait. Boubyan's risk appetite has a high influence on its VR due to aggressive growth, although we also consider the benefit to risk management from being part of the NBK group. The rating also factors in its strong capitalisation and improving earnings. KFH's VR reflects a higher risk appetite due to aggressive growth plans in Turkey and high levels of restructured loans, which puts pressure on our assessment of asset quality and has a high influence on the rating. The rating also considers KFH's sensitivity to regional operating environments, although this is not a constraining factor. Underpinning the rating are KFH's strong Islamic franchise in Kuwait and globally, clear strategic objectives and improving capitalisation. GB is making good progress in reducing historical impaired loans but Fitch's assessment of asset quality also considers high borrower and sector concentrations. Asset quality therefore has a high influence on the rating. GB's VR reflects an evolving company profile following restructuring, a conservative strategy and a low risk appetite. CBK's VR reflects improved execution under its renewed and clearer strategy, expected improvement in earnings and adequate capitalisation. We weigh these factors against a higher risk appetite and pressure on asset quality due to above average borrower concentrations. AUBK's VR is underpinned by its company profile, benefiting strategically and operationally from being part of the Ahli United Bank Group. The rating also factors in AUBK's lower capital ratios compared with peers and high single borrower and sector concentrations. ABK's VR reflects its higher risk appetite due to its expansion in Egypt (B/Stable) following the acquisition of Pireaus Bank Egypt in 2015. At the same time, we also believe ABK's franchise is stronger given the diversification benefits that this represents. The rating also factors in ABK's acceptable capitalisation, which offsets immediate risks to the bank from Egypt. KIB's VR reflects the bank's new and experienced management team, the successful execution of strategy, expected increase in earnings, improving asset quality following write-offs and portfolio clean-up and healthy capital buffers. The rating also considers a small franchise, high credit concentrations to real estate and single borrower, in addition to evolving underwriting standards and risk controls compared with peers. IBK's VR is highly influenced by its company profile, reflecting its development role in Kuwait and strong funding profile. IBK's funding is almost exclusively in the form of a long-term KWD300m loan (maturing 2027) from the Kuwaiti government. Fitch believes the loan will be renewed upon maturity. Given IBK's mandate, its risk profile is different to that of the commercial banks but it is exposed to high concentration risk. The bank is also exposed to market risk from securities investments (including international managed private equity funds), which could lead to earnings volatility. Burgan's VR considers its higher risk appetite given its fast strategic growth in regional markets, relatively weak asset quality, including high credit concentrations and high related party lending. In this context we also consider continuing pressure on regulatory capital ratios. Capitalisation and asset quality therefore have a high influence on the rating. The VR is underpinned by a strong, experienced and stable management team, acceptable profitability and a diverse franchise. Warba's company profile has a high influence on its VR given the bank's early stage of growth and evolving franchise and business model. Warba generates modest earnings and profitability, which are key rating weaknesses. As a new bank, Warba has a higher risk appetite than peers given its business mix and sensitivity to market conditions from international investments. Despite low levels of impaired loans, asset quality is tempered by large credit concentrations by name and industry. The VR also reflects good risk management and underwriting standards and strong capital ratios. SENIOR DEBT The senior debt rating of Burgan Senior SPC Limited, a special purpose vehicle (SPV) wholly owned by Burgan, is aligned with Burgan's IDRs. Fitch believes that Burgan will support the senior debt issued by the SPV if required. The rating of NBK's senior unsecured commercial paper is aligned with the bank's Short-Term rating of 'F1+' SUBSIDIARY National Bank of Kuwait (International)'s IDRs are equalised with NBK's. Its SR 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. RATING SENSITIVITIES IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT The Kuwaiti banks' IDRs, SRs and SRFs are potentially sensitive to a change in Fitch's assumptions around the Kuwaiti authorities' propensity or ability to provide timely support to the banking sector. At present, we do not consider there is much likelihood of any change. VR Given NBK's high VR, an upgrade is unlikely. NBK's ratings could be downgraded if FCC comes under renewed pressure and the bank is unable to reduce its borrower concentration risk. An improvement in Boubyan's franchise in conjunction with sustainable lending growth without material asset quality deterioration could be positive for the bank's VR. The VR is sensitive to continuing rapid loan growth. Upside potential for KFH's VR would require further improvement in profitability and asset quality in line with the bank's on-going restructuring plan. Downside pressure on the VR could result from significant weakening of asset quality, especially from the bank's Turkish subsidiary. GB's VR could be upgraded if its single borrower concentrations were significantly reduced and asset quality was better overall. A change in the bank's current conservative expansion strategy, such as rapid growth internationally, and weaker underwriting standards could negatively affect the VR. CBK's VR could be upgraded further if its company profile continues to improve, including further diversification of the franchise and business model. Downside pressure on the VR would arise from a higher risk strategy being deployed or the bank incurring material losses internationally. AUBK's VR could face downward pressure if there was a significant deterioration in asset quality due to event risk arising from its large borrower concentrations, eroding capital buffers. There is limited rating upside given its current level, particularly when considering the bank's relatively undiversified franchise. An upgrade of ABK's VR would be contingent on further strengthening the franchise, including the successful integration of the bank's Egyptian acquisition. Downside pressure on the VR would result from market risks that were not managed adequately and asset quality deterioration leading to weaker capital ratios. Upside for KIB's VR could come from further improvement in the company profile, franchise and risk appetite, in addition to stabilised asset quality. 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. IBK's VR could be upgraded if there were a significant strengthening of the bank's company profile, leading to improved financial metrics. A loss of its government funding, although highly unlikely, would lead to a downgrade. Burgan's VR could be upgraded if there is a sustained improvement in its capital ratios commensurate with its risk profile as well as a significant fall in related-party lending. The VR could be downgraded if capital ratios or asset quality weaken. Warba's VR could be upgraded with a stronger company profile and franchise, as well as a sustained improvement in earnings and profitability. The VR could be downgraded if capital ratios or asset quality weaken materially or if the bank's strategy proves unsuccessful. SENIOR DEBT The senior debt rating of Burgan Senior SPC Limited is sensitive to changes in Burgan's IDRs. The rating of NBK's senior unsecured commercial paper is sensitive to any change in the bank's Short-Term rating of 'F1+' SUBSIDIARY AND AFFILIATED COMPANY National Bank of Kuwait (International)'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. 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 affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'AA-' Commercial Paper affirmed at 'F1+' National Bank of Kuwait (International) Plc: Long-Term IDR affirmed at 'AA-'; Outlook Stable Short-term IDR affirmed at 'F1+' Support Rating affirmed at '1' Boubyan Bank: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Kuwait Finance House: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bb' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Gulf Bank: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bb' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Commercial Bank of Kuwait: 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+' Industrial Bank of Kuwait: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Al Ahli Bank of Kuwait: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Ahli United Bank (Kuwait): Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Kuwait International Bank: 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+' Burgan Bank: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bb' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Burgan Senior SPC Limited: Senior unsecured long-term Rating affirmed at 'A+' Senior unsecured short-term Rating affirmed at 'F1' Warba Bank: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'b+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Contact: Primary Analysts Mahin Dissanayake (all banks except AUBK) Director +44 20 3530 1618 Fitch Ratings Limited 30 North Colonnade London E14 5GN Redmond Ramsdale (AUBK) Senior Director +971 4 424 1202 Fitch Ratings Limited Al Thuraya Tower 1, Office 1806, Dubai Media City, Dubai, United Arab Emirates PO Box 502030 Secondary Analysts Gilbert Hobeika (all banks except NBK, NBKI, Boubyan and Warba ) Associate Director +44 20 3530 1004 Maria Irusta Barasoain (NBK, NBKI, Boubyan and Warba) Analyst +44 203 530 1283 Committee Chairperson Eric Dupont Senior Director +33 1 4429 9131 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Rose Millburn, London, Tel: +44 203 530 1741, Email: rose.millburn@fitchratings.com. 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