Fitch Ratings - Dubai : Fitch Ratings has upgraded Gulf Bank K.S.C.P.'s (GB) Viability Rating (VR) to 'bbb-' from 'bb+'. Fitch has also affirmed the bank's Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook.

The upgrade of GB's VR reflects the bank's improved risk profile and resilient asset quality.

KEY RATING DRIVERS

GB's IDRs reflect potential support from the Kuwaiti authorities, if needed. This considers Kuwait's strong capacity to support the banking system and its record of supporting domestic banks. The Stable Outlook on GB's Long-Term IDR reflects that on the Kuwaiti sovereign rating.

The 'F1' Short-Term IDR is the lower of two options mapping to a 'A' Long-Term IDR because a significant part of GB's funding is related to the government and a stress scenario for GB would likely come at a time when the sovereign itself is experiencing some form of stress.

The VR reflects GB's good domestic franchise, cautious risk approach, resilient asset quality, recovering profitability and stable funding despite high deposit concentration. The VR also considers only adequate capitalisation and high loan concentrations, albeit similar to peers.

Government Support: The Kuwaiti authorities have strong ability and willingness to provide support to domestic banks irrespective of the bank's size, franchise, funding and level of government ownership. This view considers the authorities' record of support for the domestic banking system. High contagion risk among domestic banks is an added incentive for the state to provide support to any Kuwaiti bank if needed, to maintain market confidence and stability.

Good Domestic Franchise: GB is the fourth-largest bank in Kuwait, with a market share of 9.1% by local assets at end-1H21. The bank's good branch network and strong brand underpin its franchise. GB's competent and highly experienced management supports its good record of strategy implementation. GB's strategy is consistent, based on domestic organic growth, fast growth in retail, selective corporate lending and digital transformation.

High Concentrations: Concentrations by economic sector and single obligor is the main risk to GB's asset quality and capital, similar to peers. However, GB's good risk management and cautious approach to risk-taking mitigate its risk profile.

Resilient Asset Quality: GB's Stage 3 loans ratio is stable (1% at end-2021), lower than that of peers and supported by write-offs. The Stage 2 loans ratio (6.6% at end-2021) compares well with peers. The potential problem loans generation ratio is low. GB's reserve coverage of Stage 3 loans (586% at end-2021) and gross loans (5.8%) is higher than that of peers.

Recovering Profitability: GB's net profit improved by 46% in 2021 owing to lower funding costs and impairment charges, but remained below pre-pandemic levels. Fitch expects GB's profitability to improve in 2022 in the context of expected growth, higher interest rates and stable impairment charges.

Adequate Capitalisation: GB's common equity Tier 1 (CET1) ratio (14.5% at end-2021) is adequate and Fitch expects it to remain stable in 2022. High excess loan loss allowances of Stage 3 equivalent to 33.3% of CET1 capital at end-2021 largely mitigate high loan book concentrations. The repayment of KWD100 million subordinated Tier 2 bonds, only half of which were refinanced in 2021, was behind the reduction of GB's total capital adequacy ratio by around 160bp to 16.7% at end-2021.

Stable Funding: Customer deposits provide the bulk of GB's funding (86% at end-2021). These deposits are stable, which mitigates the risks arising from high concentration and maturity mismatches. GB's gross loans-to-deposits ratio is high (97% at end-2021; above peers), but closely managed by the bank. Net liquid assets accounted for a modest 6% of total assets at end-2021 and covered only 8% of customer deposits, which was lower than at peers.

RATING SENSITIVITIES

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

A downgrade of GB's Long-Term IDR would require a downward revision of the bank's Government Support Rating (GSR). The latter would likely stem from weaker ability to support, reflected in a Kuwaiti sovereign downgrade, which is not our base case considering the Stable Outlook on the sovereign rating.

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

A deterioration in asset quality, reflected in higher Stage 3 and Stage 2 loans and write-offs, could lead to a downgrade of the VR, especially if impairment charges pressure the bank's profitability to the extent it affects capitalisation.

A sustained deterioration in the domestic operating environment or increased concentrations to higher risk economic sectors and single obligors could also negatively affect the VR, especially if this impacts asset quality and capitalisation.

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

An upgrade of GB's Long-Term IDR could come from an upward revision of its GSR. The latter would likely stem from a stronger ability to support, reflected in a Kuwaiti sovereign upgrade. However, this is unlikely in the near term, given the already high level of the GSR and the recent downgrade of the sovereign.

A further upgrade of the VR is unlikely as it would require a material improvement in the business profile, including market position and more diversified business model, including lower concentrations by economic sectors and single obligors. The latter will be challenging considering the undiversified and developing nature of the Kuwaiti economy, which offers limited opportunities for further diversification.

VR ADJUSTMENTS

The Business Profile score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: Market Position (positive).

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

GB's IDRs are driven by an extremely high probability of support from the Kuwaiti sovereign.

ESG CONSIDERATIONS

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

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Link to Rating Actions: Rating Actions

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

Additional information is available on www.fitchratings.com

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