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
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