Fitch affirms National Bank of Kuwait at 'AA-'; outlook stable

The Stable Outlook on NBK's Long-Term IDR reflects that on the Kuwaiti sovereign rating.

  
(The following statement was released by the rating agency)

Fitch Ratings-London-September 30:

Fitch Ratings has affirmed National Bank of Kuwait's (NBK) and NBK (International)'s (NBKI) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook. Fitch has also affirmed NBK's Viability Rating (VR) at 'a-'.

A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

NBK's IDRs are support-driven. Its Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view of an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in NBK's SR of '1' and SRF of 'AA-'. The latter is one notch above Fitch's Domestic-Systemically Important Bank (D-SIB) SRF of 'A+' for Kuwait, given the bank's unique status and systemic importance as the flagship 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 domestic banks, as reflected by the sovereign rating (AA/Stable) and a strong willingness to do so irrespective of the bank's 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 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. Contagion risk among domestic banks is high (Kuwait is a small and interconnected market) and we believe this is an added incentive for the state to provide support to any Kuwaiti bank if needed, to maintain market confidence and stability.

The Stable Outlook on NBK's Long-Term IDR reflects that on the Kuwaiti sovereign rating.

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

The ratings of NBKI are equalised with those of NBK, as Fitch views NBKI as strategically important for NBK. 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, the full ownership by NBK, the common branding and NBKI's stable financial profile that supports NBK's strategic objectives.

The Stable Outlook on NBKI's Long-Term IDR reflects that on NBK's ratings.

VR - NBK

The VR reflects NBK's leading franchise as Kuwait's flagship bank, diversified business model, stable asset quality and profitability, solid capitalisation, stable funding and liquidity, as well as a fairly stable operating environment in Kuwait. The VR also takes into consideration high loan concentration by sector and single obligor by international standards (although lower than local peers) and exposures to more challenging markets than Kuwait.

NBK continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of lower oil prices. The bank is 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 environment factors in NBK's exposure to developed markets such as western Europe and north America, but also to more challenging ones regionally such as Egypt and Bahrain. Despite its geographical diversification, NBK still generates 76% of its operating income in Kuwait and its core funding is still reliant on Kuwaiti wholesale depositors.

NBK is the flagship bank and leading franchise in Kuwait where it enjoys a leading market share (about 33% of sector assets at end-1H19). The bank's size, large branch network, distribution capabilities, strong client relationships, expertise, brand, reputation and long-established geographical footprint provide NBK with clear competitive advantages. NBK is the only Kuwaiti bank that provides both conventional and Islamic banking (through its 59.9%-owned sharia-compliant bank Kuwaiti subsidiary, Boubyan Bank; A+/Stable/bbb-).

NBK benefits from a diversified business model, wider opportunities and a larger size for it to reduce concentrations compared with domestic peers. However, concentrations by sector and single obligor remain high by international standards.

NBK has a record of low impaired loans (about 1.4% of gross loans at end-1H19) and problem loans. Asset quality benefits from the bank's leading franchise and diversified business model, enabling it to underwrite high-quality borrowers. The bank's reserve coverage is healthy (234% of impaired loans and 3.3% of gross loans at end-1H19), especially given the strong asset quality, compares well with peers and is likely to remain high given the stringent regulatory requirements. This is necessary in light of concentrations and non-Kuwaiti risks. Fitch believes asset quality metrics are likely to fluctuate over economic cycles due to NBK's exposure to challenging markets.

NBK's profitability is stronger than peers in terms of generation capabilities, diversification and stability. This is due to stable net interest margins, better cost efficiency (including cost optimisation across the group) and stable loan impairment charges. Fitch expects NBK to maintain its profitability despite volatility risks from its regional and international expansion (about 24% of operating income comes from non-Kuwaiti operations). NBK's earnings have proven to be stable.

NBK's capital ratios are strong and compare well with peers. The bank's capitalisation is supported by consistent internal capital generation capabilities and a strong ability to raise capital when required. This was demonstrated by the issue of USD700 million Tier 1 instruments and KWD125 million Tier 2 subordinated debt in 2015 to boost regulatory capital ratios and adhere to the additional D-SIB capital requirements, as well as the rights issue of KWD137.6 million in 2016.

NBK benefits from stable funding and liquidity. Reliance on concentrated wholesale deposits is high but below peers. These deposits are primarily sourced from the government, quasi-government entities and large corporates and have proven to be stable, mitigating liquidity maturity mismatches. Fitch views NBK's retail deposit base as reasonable. NBK issued five-year senior unsecured debt of USD750 million in 2017 to support its funding. The bank's liquidity is well-managed and liquidity risk remains contained. The financing/deposits ratio (88% at end-1H19) is within peers, and liquidity flexibility is underpinned by a large stock of net liquid assets accounting for 14.4% of total assets and covering 20.6% of customer deposits at end-2018, mitigating the bank's net interbank borrower position.

NBK is exposed to high concentration by sector and single obligor, albeit less than peers, which leaves the bank vulnerable to significant event risk. The bank is highly exposed to domestic real estate, a sector that can be volatile.

NBK is exposed to international markets through its subsidiaries, some of which are challenging. Risk control and reporting tools are satisfactory across the group and can support growth. Market risk is well-managed and controlled, but challenging markets such as Egypt and Bahrain create pressures on asset quality. NBK also remains directly and indirectly exposed to equity markets from share financing for high net-worth individuals and equities held as collateral for other lending. Many of the largest exposures are to prominent Kuwaiti family-owned groups that dominate the private sector and to regional/international businesses.

SENIOR DEBT - NBK

The rating of NBK's senior unsecured commercial paper is in line with the bank's Short-Term IDR of 'F1+'. The senior debt ratings of NBK SPC Limited, a special purpose vehicle (SPV) wholly owned by NBK, are aligned with the bank's IDRs. Fitch believes that NBK will support the senior debt issued by the SPV if required.

RATING SENSITIVITIES

IDRS, SR and SRF - NBK and NBKI

NBK'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 see much likelihood of a change.

NBKI's IDRs are sensitive to a change in NBK's ratings. Fitch does not regard this as likely at present, as indicated by the Stable Outlook on NBK's rating. NBKI's ratings would be downgraded if Fitch views the propensity of NBK and/or the Kuwaiti authorities to support NBKI as diminishing. This would most likely be the result of a change in NBKI's strategic role in the group, increased independence of management or a reduction in NBK's ownership stake.

VR - NBK

Upside for NBK's VR could come from further diversification in the bank's loans, deposits and operating income, which is unlikely in the short term, in Fitch's view. Downside pressure on the VR could arise from weaker capitalisation and NBK's inability to reduce concentration risk.

SENIOR DEBT - NBK

The senior debt ratings are subject to the same sensitivities as NBK's IDR. The rating of NBK's senior unsecured commercial paper is sensitive to a change in the bank's Short-Term IDR.

Public Ratings with Credit Linkage to other ratings

NBK's Long-Term IDR is driven by an extremely high probability of support from the Kuwaiti sovereign and NBKI's Long-Term IDR is driven by an extremely high probability of support from its parent, NBK. See description above.

ESG Considerations

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. For more information on our ESG Relevance Scores, visit .

National Bank Of Kuwait (International) PLC; Long Term Issuer Default Rating; Affirmed; AA-; RO:Sta

; Short Term Issuer Default Rating; Affirmed; F1+

; Support Rating; Affirmed; 1

National Bank of Kuwait; Long Term Issuer Default Rating; Affirmed; AA-; RO:Sta

; Short Term Issuer Default Rating; Affirmed; F1+

; Viability Rating; Affirmed; a-

; Support Rating; Affirmed; 1

; Support Rating Floor; Affirmed; AA-

----senior unsecured; Short Term Rating; Affirmed; F1+

NBK SPC Limited

----senior unsecured; Long Term Rating; Affirmed; AA-

----senior unsecured; Short Term Rating; Affirmed; F1+

Contacts:

Primary Rating Analyst

Redmond Ramsdale,

Senior Director

+44 20 3530 1836

Fitch Ratings Ltd

30 North Colonnade, Canary Wharf

London E14 5GN

Secondary Rating Analyst

Amin Sakhri,

Director

+971 4 424 1202

Secondary Rating Analyst

Jamal El Mellali,

Associate Director

+44 20 3530 1969

Committee Chairperson

Artur Szeski,

Senior Director

+48 22 338 6292

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com.

Additional information is available on

Applicable Criteria

Bank Rating Criteria (pub. 12 Oct 2018)

Short-Term Ratings Criteria (pub. 02 May 2019)

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Policy

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT . PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT . FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see ), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.

More From Financial Services