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' record of support for the domestic banking system in case of need.
The Central Bank of Kuwait (CBK) 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 when 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, to maintain market confidence and stability.
We consider that support from the sovereign is more likely than support from the bank's parent. This reflects the sovereign's superior flexibility as well as transfer and convertibility risk from Bahrain.
The Stable Outlook on AUBK's Long-Term IDR reflects the Stable Outlook on the Kuwaiti sovereign rating.
Fitch assigns Short-Term IDRs according to the rating correspondence table between Long-Term IDRs and Short-Term IDRs as described in the bank rating criteria and short-term ratings criteria. A Long-Term IDR of 'A+' corresponds to two Short-Term IDRs of either 'F1' or 'F1+'. In the case of AUBK, Fitch 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 when the sovereign itself is experiencing some form of stress. Fitch judges this "wrong-way" risk to be high in Kuwait, but not likely to happen in the short-to-medium term.
The VR reflects AUBK's adequate franchise that benefits from being part of the Ahli United Bank (AUB) group, its competent management team, resilient asset quality, increasing profitability as well as adequate capital ratios. The VR also considers high concentration by sector and single obligor and higher reliance on wholesale deposits than most peers.
AUBK continues to benefit from a fairly stable operating environment in Kuwait. The bank is exposed to low economic growth and the narrow and undiversified Kuwaiti economy, but Fitch believes that the government's continuing capital-spending plans will partially offset the pressures.
AUBK's adequate franchise benefits, via AUB-Bahrain (AUBB; its parent), from a broader range of products and services and geographic footprint compared with most peers in its domestic market. AUBK is able to handle larger cross-border transactions by involving other AUB group entities and using AUBB's balance sheet. AUBK has easier access than domestic peers to Tier 1 corporates and high-quality financing through the AUB group.
The bank has a competent management team that is well-experienced in local and regional banking. AUBK's strategic objectives have proven to be consistent, sustainable and articulated around corporate-, domestic- and organic-led growth. Management had a good execution record during the past five years.
AUBK's asset quality is resilient. The impaired financing ratio (1.2% at end-1H19; below peer weighted-average (PWA) of 1.7%) has improved owing to technical write-offs in 2017, as seen across the Kuwaiti banking sector to support IFRS 9 implementation. The bank's problem financing generation remains low despite a big write off in 1H19. Past due but not impaired financing is well-monitored. Fitch expects AUBK's asset quality to remain stable.
AUBK's reserve coverage of impaired financing continues to be high, in line with peers, due to the prudent actions of the CBK, 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. The CBK has implemented a stringent version of the IFRS 9 at end-2018. AUBK's excess of provisions for credit losses under CBK norms over allowances for expected credit losses under the implemented IFRS 9 version was KWD30.5 million at end-2018. Fitch expects AUBK's asset quality to remain stable and provisions for impaired loans high. However, concentrations will remain a constraint on asset quality.
AUBK's profitability has increased and was in line with the PWA in 1H19. Sound cost efficiency and declining financing impairment charges (FICs) due to a resilient financing book have offset volatile net profit margins and supported the profitability of the bank. AUBK's earnings are primarily generated from net financing income (five-year average: 83% of operating income; PWA: 72%), mainly from real-estate-related sectors in Kuwait, which may be variable over economic and business cycles.
AUBK's capital and leverage ratios remain adequate for its risk profile, albeit declining and below peers. This is primarily due to the implementation of Basel III that has reduced capital buffers over minimum requirements and increased the bank's risk-weighted assets density. AUBK's capital ratios have very limited benefit from the alpha factor (haircut on the risk-weighted assets calculation to reflect the loss-absorption capacity of some deposits) owing to its small percentage of investment accounts (only 3% of credit risk exposures were funded through investment accounts at end-2018).
AUBK benefits from internal capital generation and conservative growth. The bank's core capital (common equity tier 1 was 80% of the total capital base at end-1H19; in line with the PWA) and resilient asset quality support its capital risk-absorption capacity. The bank pays dividends equivalent to 50% of net income but will restrain dividends if growth resumes. The bank has the capacity to raise capital if needed through its strong AUB ownership (the bank issued a perpetual Tier 1 sukuk for USD200 million in October 2016 to boost its capital buffers) but Fitch does not expect any capital increase in the near term, especially with the potential merger/acquisition transaction between Kuwait Finance House (KFH) and AUBB. Large concentrations will remain the main risk.
Fitch's assessment also incorporates AUBK's concentrated business model. The bank remains highly concentrated by sector and single obligor, although this is common in Kuwait. The bank is highly exposed to domestic real estate relative to other banks, a sector that can be volatile and see lower prices and sales. The bank's underwriting standards are conservative (financing is primarily for completed and revenue-generating properties with low financing-to-value ratio) and partly mitigate risks. Fitch also considers the benefits of AUBK's adequate risk controls and management from being part of AUB group.
AUBK has higher reliance on wholesale deposits than most peers (75% of customer deposits at end-1H19, above PWA of 54%) and deposit concentration is high (the 20 largest deposits represented 56% of the total at end-1H19), albeit declining (58% at end-2018, 60% at end-2017 and 63% at end-2016). Large deposits are primarily from government-related entities and large corporates; these have proven to be historically stable and are supported by related-party deposits (18%), which mitigate risks arising from liquidity maturity mismatches.
AUBK's liquidity risk remains contained. Fitch's calculated financing/deposits ratio (based on gross financing; 93% at end-1H19) is above the PWA (86%) and has increased slightly with the issuance of Tier 1 sukuk in 2016 in replacement of some deposits. AUBK's adequate stock of net liquid assets (equivalent to 12% of total assets and 15% of customer deposits at end-1H19) underpins the bank's liquidity.
In assessing AUBK's ratings, we considered important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications.
IDRS, SR and SRF
AUBK'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.
AUBK's VR could face downward pressure if there was a significant deterioration in asset quality due to event risk arising from its large financing concentrations, eroding capital buffers. A more diversified business model, large reduction in concentrations and improvement in capital ratios could have a positive impact on the VR.
Public Ratings with Credit Linkage to other ratings
The Long-Term IDR of AUBK is driven by an extremely high probability of support from the Kuwaiti sovereign as described above.
ENVIRONMENT, SOCIAL AND GOVERNANCE SCORES
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - 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.
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 bank's credit profile in combination with other factors. 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 embedded in their operations and obligations, although this only has a minimal credit impact on the entities. For more information on our ESG Relevance Scores, visit .
Ahli United Bank (Kuwait); Long Term Issuer Default Rating; Affirmed; A+; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F1
; Viability Rating; Affirmed; bbb-
; Support Rating; Affirmed; 1
; Support Rating Floor; Affirmed; A+
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Additional information is available on
Bank Rating Criteria (pub. 12 Oct 2018)
Short-Term Ratings Criteria (pub. 02 May 2019)
Sukuk Rating Criteria (pub. 22 Jul 2019)
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