Fitch downgrades 11 Kuwaiti Banks

Fitch Ratings - Dubai: Fitch Ratings has downgraded 11 Kuwaiti banks' Long-Term Issuer Default Ratings (IDRs). Their Outlooks are Stable.

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

Fitch has also downgraded the support-driven Long-Term IDRs of NBK's subsidiaries, NBK (International) PLC (NBKI) and NBK France SA (NBKF) and of BBY's subsidiary, Bank of London and the Middle-East PLC (BLME). Their Outlook are Stable.

The rating actions follow a similar action on Kuwait's sovereign rating on 27 January 2022 (see "Fitch Downgrades Kuwait to 'AA-'; Outlook Stable" at www.fitchratings.com).

The banks' Viability Ratings (VRs) are unaffected. A full list of rating actions is provided below.

Fitch has withdrawn the Support Ratings (SRs) and Support Rating Floors of the 11 Kuwaiti banks and the SRs of NBKI, NBKF and BLME as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, Fitch has assigned a Government Support Rating (GSR) of 'a+' to NBK and 'a' to the 10 other Kuwaiti banks, as well as a Shareholder Support Rating (SSR) of 'a+' to NBKI and NBKF and 'a' to BLME. The IDRs of the 11 Kuwaiti banks are driven by their GSRs. The IDRs of NBKI, NBKF and BLME are driven by their SSRs.

KEY RATING DRIVERS

IDRS AND GSRs - 11 KUWAITI BANKS

The 11 Kuwaiti banks' Long-Term IDRs are driven by Fitch's view of potential support from the Kuwaiti state. The GSR of 'a+' 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 GSR of NBK is one notch above Fitch's domestic systemically important bank GSR 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. The GSR of IBK also reflects the bank's development mandate, with the bank's primary focus being the provision of concessionary medium- and long-term financing for the establishment, expansion and modernisation of private-sector industries.

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 banks' size, franchise, funding structure and level of government ownership. This view is underpinned 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 Stable Outlook on the 11 Kuwaiti banks' Long-Term IDRs mirrors that on the Kuwaiti sovereign rating.

Fitch assigns Short-Term IDRs according to the mapping correspondence described in its Bank Rating Criteria. The 11 Kuwaiti banks' 'F1' Short-Term IDRs are the lower of two options mapping to an 'A+' or 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.

IDRS AND SSR - NBKI, NBKF AND BLME

NBKI's, NBKF's and BLME's IDRs and SSRs are based on Fitch's assessment of an extremely high probability of support from their respective parents, NBK and BBY, if required. This reflects NBK's and BBY's strong ability (as indicated by the banks' ratings) and willingness to provide support to NBKI, NBKF and BLME.

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 service Gulf citizens' interests, 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 latter's important role 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 ratings of BLME are equalised with those of BBY, given its key role for the parent as a strategically important subsidiary providing it with access to the highly developed UK market. Fitch views BLME as a key and integral part of the group, building BBY's private-banking and wealth-management offering (mainly to group and broader GCC clients) and therefore plays a key role in executing BBY's own strategic objectives. Fitch's assessment also considers high management-and-business integration between BLME and BBY.

The Stable Outlooks on NBKI's, NBKF's and BLME's Long-Term IDRs mirrors that on their respective parents, NBK and BBY.

VRs

The VRs of the 11 Kuwaiti banks are unaffected by the downgrade of the sovereign, considering their lower level and the adequate credit quality and resilience of the banks. Fitch does not assign a VR to NBKI, NBKF and BLME given their close integration with their respective parents and that the subsidiaries' franchises cannot be assessed meaningfully in their own right. Fitch also does not assign a VR to IBK, due to the importance of the bank's policy role in its lending and funding.

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

The programmes' and issuance's senior unsecured long- and short-term ratings under NBK SPC Limited, KFH Sukuk Company SPC Limited, Boubyan Sukuk Limited, Burgan Senior SPC 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 down 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 directly 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' IDRs would require a downward revision of the banks' respective GSRs. The latter would likely stem from a weaker ability to support, reflected in a further Kuwaiti sovereign downgrade, which is not our base case considering the Stable Outlook on the sovereign rating.

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

A downgrade of NBK's ratings would trigger a downgrade of NBKI's and NBKF's. NBKI's and NBKF's ratings would also be downgraded if Fitch views the propensity of NBK or the Kuwaiti authorities to support NBKI and NBKF as diminishing. This would most likely be the result of a reduction in NBKI's and NBKF's strategic role for NBK, in integration with NBK or in NBK's ownership stake. However, this is unlikely in the near term.

A downgrade of BBY's ratings would trigger a downgrade of BLME's. BLME's ratings would also be downgraded if Fitch views the propensity of BBY or the Kuwaiti authorities to support BLME as diminishing. This would most likely be the result of a reduction in BLME's strategic role for BBY, in integration with BBY or in BBY's ownership stake. However, this is unlikely in the near term.

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

An upgrade of the 11 Kuwaiti banks' IDRs could come from an upward revision of the banks' respective GSRs. However, this is unlikely in the near term, given the already high level of the GSRs and the recent downgrade of the sovereign.

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. However, this is unlikely in the near term.

NBKI's and NBKF's IDRs could be upgraded if NBK's IDRs are upgraded. BLME's IDRs could be upgraded if BBY's IDRs are upgraded.

Programmes' and Issuance's Ratings:

The programmes' and issuance's senior unsecured ratings under NBK SPC Limited, KFH Sukuk Company SPC Limited, Boubyan Sukuk Limited, Burgan Senior SPC 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' ratings are sensitive to changes in BB's and KIB's Long-Term IDRs, respectively. The Tier 2 subordinated notes' and certificates' ratings are 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 from two currently 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. BLME's Long-Term IDR is linked to BBY's.

ESG CONSIDERATIONS

KFH, BBY, AUBK, KIB and WB each has an ESG relevance score of '4' for Governance Structure, in contrast to '3' typical of comparable conventional banks, due to 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 has a negative impact on the banks' credit profiles and is relevant to the ratings in combination with other factors.

BB has an ESG relevance score of '4' for Governance Structure, reflecting KIPCO's potential influence over the bank's strategies, effectiveness and capital optimisation.

KFH, BBY, AUBK, KIB and WB each has an ESG relevance score of '3' for Exposure to Social Impacts, 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.

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 entities, either due to their nature or the way in which they are being managed by the entities. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. 

Link to Rating Actions: Rating Actions

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com 

Additional information is available on www.fitchratings.com 

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