Fitch Affirms 9 Kuwaiti Banks; Upgrades Gulf Bank's VR

Fitch Ratings-London-09 November 2015

Fitch Ratings has affirmed National Bank of Kuwait's (NBK) Long-term Issuer Default Rating (IDR) at 'AA-'. The Long-term IDRs of Kuwait Finance House (KFH), Gulf Bank (GB), Commercial Bank of Kuwait (CBK), Al Ahli Bank of Kuwait (ABK), Ahli United Bank (Kuwait) (AUBK), Kuwait International Bank (KIB), Industrial Bank of Kuwait (IBK) and Boubyan Bank (Boubyan) have all been affirmed at 'A+'. The Outlooks on all Long-term IDRs are Stable. A full list of rating actions is at the end of this rating action commentary.

Fitch has upgraded GB's Viability Rating (VR) to 'bb' from 'bb-' due to its stronger company profile post restructuring. The bank has completed a wide ranging restructuring and worked out previously significant volumes of impaired loans, since the capital support it received by the Kuwait Investment Authority in 2008 following large derivatives losses. The upgrade also reflects GB's lower risk appetite.

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS

The Kuwaiti banks' IDRs are support-driven. Their Support Ratings (SRs) and Support Rating Floors (SRFs) reflect Fitch's view that there is an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in the SR of '1' and the SRF of 'A+' for all rated banks (apart from NBK) irrespective of their size, franchise, funding structure and the level of government ownership. NBK's SRF is one notch higher at 'AA-' given its 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 its banks, as reflected by its rating (AA/Stable), combined with Fitch's belief that there would be a strong willingness to do so. This view is reinforced by the authorities' track record to support 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; as in the case of GB. There is high contagion risk among domestic banks (Kuwait is a relatively small and interconnected market) and we believe this is an added incentive to provide state support to any Kuwaiti bank if needed, in order to maintain market confidence and stability.

The Stable Outlooks on the banks' Long-term IDRs reflect the Outlook on the Kuwaiti sovereign rating.

VRS

The Kuwaiti banks benefit from a fairly stable operating environment. While the banks are not immune to the fall in oil prices, Fitch believes that the government's capital spending plans will partially offset the pressures. Several major projects have been awarded and financed in 2014 and 2015, which are providing growth opportunities for the sector.

Asset quality continues to improve across the sector, reflected in reducing volumes of non-performing loans (NPLs). Reserves for NPLs are generally high, primarily due to the central bank requiring all banks to build up precautionary general provisions. The main threat to asset quality is the banks' significant concentration by sector and borrower. A large part of these exposures are to prominent Kuwaiti family-owned groups that dominate the private sector. Some of these loans appear to be name lending and backed by equities. Corporate governance regulations are slowly improving, but Fitch finds that transparency and disclosure relating to the banks' largest credit exposures remain weak. Many banks remain directly and indirectly exposed to the equity market from share financing (for high net-worth individuals) and collateral held. The banks are also highly exposed to domestic real estate, a sector that can be volatile. The sector has seen lower sales in 2015 but prices are holding up. Both NBK and KFH are exposed to international markets through subsidiaries.

NBK's capitalisation has a high influence on the VR. Its Fitch core capital (FCC) ratio declined in 2014 and 1H15, from high growth and low internal capital generation, to a level putting pressure on its high VR. The VR is underpinned by NBK's flagship status and dominant franchise, which supports it revenue generation capacity and ability to finance better quality assets than peers. NBK's VR also factor in the bank's strong management and consistent strategy and solid funding profile, benefiting from large and stable government related deposits. High borrower concentration puts pressure on the bank's risk appetite and asset quality.

Boubyan's VR reflects its limited, but growing retail-led franchise in Kuwait. Boubyan's company profile has a high influence on its VR, including close links to its parent, NBK. The rating also factor in its aggressive growth strategy but still good asset quality and capitalisation.

KFH's VR reflects its fairly weak asset quality and aggressive growth plans in Turkey, while taking into account its leading Islamic finance franchise. A large proportion of its NPLs are from operations in Bahrain and Malaysia, and the bank is slowly working-out these legacy assets. As a leading retail bank, KFH has low levels of borrower concentration, making it less susceptible to event risk, and its funding profile is solid largely made up of granular retail deposits.

GB's improved company profile, including a broader franchise, underpins its VR. Asset quality is gradually improving, and the bank has significantly reduced its NPL ratio through recoveries and write-offs. Nonetheless, loan concentration by borrower remains high. GB's restructuring focusses primarily on strengthening its business and retail franchises, and is reducing its risk appetite, in Fitch's view.

CBK's company profile benefits from its strong corporate focus, although delays remain in executing the bank's strategy. CBK's earnings and profitability remain weak compared with peers, although this is partly offset by the bank's good capitalisation and liquidity.

AUBK's VR is underpinned by its company profile, benefiting strategically and operationally from being part of the Ahli United Bank Group. The bank has a strong management team and its strategic objectives appear achievable. The bank's strong corporate franchise has ensured above average performance through the cycle. AUBK's capital ratios are adequate but not as strong as some peers.

ABK's VR reflects its fairly high risk appetite, for example its expected expansion in Egypt (B/Stable) with the acquisition of Pireaus Bank Egypt, likely to be finalised in 4Q15. The rating also factor in the bank's good capitalisation and healthy reserve coverage for NPLs.

KIB's VR reflects the bank's modest but improving franchise and evolving strategy. It also factors in high legacy exposure to domestic real estate and fairly high turnover of senior management over the past few years, which in Fitch's view hinders the implementation of strategic objectives. The VR is underpinned by adequate earnings and acceptable capitalisation.

IBK's VR is highly influenced by its company profile, reflecting its development role in Kuwait and strong funding profile. IBK's funding is almost exclusively in the form of a long-term KWD300m loan (maturing 2027) from the Kuwaiti government. Fitch believes the loan will be renewed upon maturity. Given IBK's mandate, its risk profile is different to that of the commercial banks but it is exposed to high concentration risk. The bank is exposed to market risk from securities investments (including international managed private equity funds), which could lead to earnings volatility.

SUBSIDIARY AND AFFILIATED COMPANY

NBKI's IDRs are equalised with NBK's. Its Support Rating of '1' reflects an extremely high probability of support from NBK, given that the bank is a key subsidiary of the group.

RATING SENSITIVITIES - IDRS, SRS AND SRFS

The Kuwaiti banks' IDRs, SRs and SRFs are potentially sensitive to a change in Fitch's assumptions around the Kuwaiti authorities' propensity or ability to provide timely support to the banking sector. At present, we do not consider there is much likelihood of any change.

Given NBK's high VR, an upgrade is unlikely. NBK's ratings could be downgraded if the bank does not strengthen capitalisation. Pressure on the rating could also come from the bank not reducing its concentration risk.

An improvement in Boubyan's franchise in conjunction with sustainable lending growth without material asset quality deterioration could be positive for the bank's VR. The VR is sensitive to continuing rapid loan growth.

Upside potential to KFH's VR would require improvement in profitability and asset quality in line with the bank's on-going restructuring plan. Downside pressure on the VR could result from significant weakening of asset quality, especially from the bank's Turkish subsidiary.

GB's VR could be further upgraded if its single name concentrations were reduced significantly and from better overall asset quality. A change in the bank's current conservative expansion strategy, such as rapid growth internationally, and weaker underwriting standards could negatively affect the VR.

Upside potential for CBK's VR would require a successful execution of strategy leading to sustained financial performance. It would also require more diversification in the loan portfolio. Downside pressure on the VR would arise from delays in the current strategy being deployed or the bank incurring material losses internationally.

AUBK's VR could face downward pressure if there was a significant deterioration in asset quality due to event risk arising from its large borrower concentrations. Upside potential is limited, in view of concentration risks and the bank's relatively limited franchise.

An upgrade of ABK's VR would be contingent on further strengthening the franchise, including the successful integration of the bank's Egyptian acquisition. Downside pressure on the VR would result from market risks that were not managed adequately and asset quality deterioration leading to weaker capital ratios.

KIB's VR could be upgraded with management executing its new strategy leading to an improvement in its franchise, risk appetite and asset quality. Downside pressure on the VR could arise from weaker asset quality and capitalisation, particularly if Kuwait were to suffer a stress in the real estate sector.

IBK's VR could be upgraded if there were a significant strengthening of the bank's company profile, leading to improved financial metrics. A loss of its government funding, although highly unlikely, would lead to a downgrade.

SUBSIDIARY AND AFFILIATED COMPANY

NBKI's IDRs are sensitive to a change in NBK's ratings. They are also sensitive to a change in Fitch's view of the importance of this subsidiary to NBK.

The rating actions are as follows:

National Bank of Kuwait:

Long-term IDR affirmed at 'AA-'; Outlook Stable

Short-term IDR affirmed at 'F1+'

Viability Rating affirmed at 'a'