Fitch revises 11 Kuwaiti banks' Outlook to Negative; affirms IDRs

Fitch Ratings - Dubai: Fitch Ratings has revised the Outlooks on 11 Kuwaiti banks' Long-Term Issuer Default Ratings (IDRs) to Negative from Stable and affirmed the banks' respective IDRs.

The banks are National Bank of Kuwait SAKP (NBK), Kuwait Finance House KSCP (KFH), Burgan Bank KPSC (BB), Al Ahli Bank of Kuwait KSCP, Boubyan Bank KSCP (BBY), Gulf Bank KSCP, Commercial Bank of Kuwait KPSC, Ahli United Bank (Kuwait), Kuwait International Bank KSCP (KIB), Warba Bank KSCP (WB) and Industrial Bank of Kuwait KSC.

Fitch has also revised the Outlook to Negative on the support-driven Long-Term IDRs of NBK's subsidiaries, NBK (International) PLC (NBKI) and NBK France SA (NBKF).

The rating actions follow a similar action on Kuwait's sovereign rating on 2 February 2021 (see "Fitch Revises Kuwait's Outlook to Negative; Affirms at 'AA'" at www.fitchratings.com), reflecting near-term liquidity risk associated with the imminent depletion of liquid assets in the sovereign's general reserve fund (GRF) in the absence of parliamentary authorisation for the government to borrow. The IDRs of the banks are driven by their Support Rating Floors (SRFs).

A full list of rating actions is provided below.

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS - 11 KUWAITI BANKS

The 11 Kuwaiti banks' Long-Term IDRs are driven by support from the Kuwaiti state. The Support Ratings (SR) of '1' for all banks, and the Support Rating Floors (SRFs) of 'AA-' for NBK and 'A+' for the 10 other banks, reflect Fitch's view of an extremely high probability of support for the banks, if needed, from the Kuwaiti authorities. The SRF of NBK is one notch above Fitch's domestic systemically important bank SRF of 'A+' for Kuwait, given its flagship status, its role in the Kuwaiti banking sector, 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 domestic banks, as reflected by the sovereign rating (AA/Negative) and a 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' record of support for the domestic banking system when needed.

The Central Bank of Kuwait operates a strict regime with active monitoring to ensure the viability of banks and has acted swiftly in the past to provide support when needed. Our view of the authorities' continued high propensity to provide support considers high contagion risk given the small number of banks and the high concentration and interconnection of banks in the system, as well as the importance of maintaining the soundness and reputation of the sector.

The Negative Outlooks on the 11 Kuwaiti banks' Long-Term IDRs reflect that on the Kuwaiti sovereign rating.

Fitch assigns Short-Term IDRs according to the mapping correspondence described in its bank rating criteria. NBK's 'AA-' Long-Term IDR maps only to an 'F1+' Short-Term IDR. The 10 other Kuwaiti banks' 'F1' Short-Term IDRs are the lower of two options mapping to an 'A+' Long-Term IDR. This is because a significant proportion of Kuwaiti banking sector funding is related to the government and a stress scenario for the banks would likely come at a time when the sovereign itself is experiencing some form of stress. Fitch judges this "wrong-way" risk as high in Kuwait, which is reflected in the Short-Term IDR of 'F1'.

IDRS AND SRS - NBKI AND NBKF

NBKI's and NBKF's IDRs and SR are based on Fitch's assessment of an extremely high probability of support from parent, NBK, if required. This reflects NBK's strong ability (as indicated by the bank's ratings) and willingness to provide support to NBKI and NBKF.

The ratings of NBKI are equalised with those of NBK, as Fitch views the subsidiary as an integral part of NBK's business. This reflects the historical and key role of NBKI in the group, its strategic location to serve Gulf citizens' interests, the high level of integration between NBK and NBKI, full ownership by NBK, common branding and NBKI's stable financial profile that supports NBK's strategic objectives. We expect NBK's commitment to NBKI to remain strong, considering the important role of the latter for the parent.

The ratings of NBKF are equalised with those of NBK given the French subsidiary's key role in providing NBK with access to the EU market following Brexit. NBKF is viewed as an important part of NBK's international banking unit, with a key role in capturing business flows between NBK's core market in the Middle East and North Africa region, and the EU. Our assessment also considers the high level of integration of NBKF with NBK, majority direct and indirect ownership by NBK (100%), as well as common branding.

The Negative Outlooks on NBKI's and NBKF's Long-Term IDRs reflect that on NBK. NBKI's and NBKF's 'AA-' Long-Term IDRs map only to an 'F1+' Short-Term IDR, in line with NBK's.

VIABILITY RATINGS

The Viability Ratings (VRs) of the 11 banks are unaffected by the revision of the Outlook on the sovereign to Negative.

Fitch does not assign a VR to NBKI and NBKF given their close integration with NBK and that the subsidiaries' franchises cannot be assessed meaningfully in their own right.

SENIOR DEBT - NBK, KFH, BB, BBY, KIB AND WB

The programmes' and issuance' senior unsecured long- and short-term ratings under NBK and NBK SPC Limited, KFH Sukuk Company SPC Limited, Burgan Senior SPC Limited, Boubyan Sukuk Limited, KIB Sukuk Limited and Warba Sukuk Limited are rated in line with and driven solely by the respective banks' IDRs. This reflects Fitch's view that default of these senior unsecured obligations would reflect the default of the respective banks in accordance with Fitch's rating definitions.

SUBORDINATED DEBT - BB AND KIB

The Tier 2 subordinated notes and certificates are rated two notches below BB's and KIB's Long-Term IDRs to reflect their subordinated status and Fitch's view of a high likelihood of poor recoveries in the event of default. Fitch does not notch the notes for incremental non-performance risk because the terms of the notes and certificates do not provide for loss absorption on a 'going-concern' basis (e.g. coupon omission or write-down/conversion). In our opinion, this risk is low given our view of potential sovereign support that could be made available to both banks.

We use the banks' Long-Term IDR as the anchor rating for the notes and certificates as we believe that potential extraordinary sovereign support for BB and KIB is likely to flow through to the banks' subordinated note holders and certificate holders. Fitch is not aware of any precedent of the Kuwaiti authorities' approach to restructuring that would result in loss mitigation for Tier 2 debt, hence resulting in a two-notch differential to the anchor rating.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of the 11 Kuwaiti banks' Long-Term IDRs would require a downward revision of the banks' respective SRFs. The latter would likely stem from a weaker ability to support, reflected in a Kuwaiti sovereign downgrade.

A weaker propensity from the Kuwaiti authorities to support the banks would also lead to a negative rating action, but this is unlikely in Fitch's view given the strong record of supporting domestic banks.

NBKI's and NBKF's ratings would be downgraded if NBK's Long-Term IDR is downgraded or if Fitch views the propensity of NBK and/or the Kuwaiti authorities to support NBKI or NBKF as diminishing. This would most likely be the result of a change in NBKI's or NBKF's strategic role in the group, increased independence of management or a reduction in NBK's ownership.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the 11 Kuwaiti banks' Long-Term IDRs could come from an upward revision of the banks' respective SRFs. However, this is unlikely in the near term given the already high level of the SRFs and the Negative Outlook.

BBY's IDRs could be upgraded and aligned with the parent's if NBK increases its ownership, integration and overall control of the bank significantly. This is unlikely in the near term.

NBKI's and NBKF's Long-Term IDRs could be upgraded if NBK's Long-Term IDR is upgraded. This is unlikely in the near term given its already high level and the Negative Outlook.

Programmes' and Issuance' Ratings:

The programmes' and issuance' senior unsecured ratings under NBK and NBK SPC Limited, KFH Sukuk Company SPC Limited, Burgan Senior SPC Limited, Boubyan Sukuk Limited, KIB Sukuk Limited and Warba Sukuk Limited are rated in line with the banks' respective IDRs and therefore subject to the same sensitivities as the banks' IDRs.

Programme ratings under KFH Sukuk Company SPC Limited, Boubyan Sukuk Limited, KIB Sukuk Limited and Warba Sukuk Limited may also be sensitive to changes to the roles and obligations of the respective banks as obligors under the sukuks' structures and documents.

BB's and KIB's Tier 2 subordinated notes' and certificates' rating is sensitive to changes in BB's and KIB's Long-Term IDRs respectively. The Tier 2 subordinated notes' and certificates rating is also sensitive to a change in notching should Fitch change its assessment of loss severity and/or relative non-performance risk. A narrowing of notching to one level below the anchor rating is unlikely in the near term without any precedent being set by the Kuwaiti authorities' through bank resolution and/or restructuring resulting in loss mitigation for Tier 2 subordinated notes and certificates.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The 11 Kuwaiti banks' Long-Term IDRs are linked to the Kuwaiti state's. NBKI's and NBKF's Long-Term IDRs are linked to NBK's.

ESG CONSIDERATIONS

Ahli United Bank (Kuwait): Governance Structure: 4

Boubyan Bank K.S.C.P.: Governance Structure: 4

Kuwait Finance House (K.S.C.P.): Governance Structure: 4

Kuwait International Bank K.S.C.P.: Governance Structure: 4

WARBA Bank K.S.C.P.: Governance Structure: 4

The Islamic banks need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure relevance score of '4' (in contrast to a typical ESG relevance score of '3' for comparable conventional banks), which has a negative impact on the banks' credit profiles in combination with other factors.

Ahli United Bank (Kuwait): Exposure to Social Impacts: 3

Boubyan Bank K.S.C.P.: Exposure to Social Impacts: 3

Kuwait Finance House (K.S.C.P.): Exposure to Social Impacts: 3

Kuwait International Bank K.S.C.P.: Exposure to Social Impacts: 3

WARBA Bank K.S.C.P.: Exposure to Social Impacts: 3

In addition, Islamic banks have an Exposure to Social Impacts score of '3' (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations imbedded in their operations and obligations, although this only has a minimal credit impact on the entities.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg 

-Ends-

Media Relations: 
Louisa Williams
London
Email: louisa.williams@thefitchgroup.com 

Ammaarah Hafezi, London
Email: ammaarah.hafezi@thefitchgroup.com 

Additional information is available on www.fitchratings.com 

© Press Release 2021