Fitch Affirms Al Ahli Bank of Kuwait at 'A+'; Outlook Stable

17/10/2017 13:37 AST

Fitch Ratings has affirmed Al Ahli Bank of Kuwait's (ABK) Long-Term Issuer Default Rating (IDR) at 'A+'; the Outlook is Stable. Fitch has also affirmed the bank's Viability Rating (VR) at 'bb+'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, SUPPORT RATING, SUPPORT RATING FLOOR

ABK's IDRs are support-driven. Its Support Rating (SR) and Support Rating Floor (SRF) 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 ABK's SRF of 'A+', in line with Fitch's actual country Domestic-Systemically Important Bank SFR.

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' track 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. 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, in order to maintain market confidence and stability.

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

We assign Short-Term IDRs according to the mapping correspondence described in our bank rating criteria. An 'A+' Long-Term IDR can correspond to a Short-Term IDR of either 'F1' or 'F1+'. In the case of ABK, we 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 at a time when the sovereign itself is experiencing some form of stress.

VR

ABK continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of low oil prices. The bank is exposed to lower economic growth, but Fitch believes that the government's continuing capital spending plans will partially offset the pressures.

ABK has a moderate franchise in Kuwait, underpinned by regional expansion. Although ABK's business model continues to be domestic-oriented, the bank benefits from the increasing geographical diversification to support revenue generation, including cross-border businesses, as well as deposit collection.

The bank has a competent management team, well experienced in local and regional banking, with an improving record of strategy execution in Kuwait and the region. The bank's strategic objectives are relatively cautious in Kuwait, but more opportunistic in the regional expansion.

ABK's VR considers the bank's higher risk appetite due to its regional expansion in Egypt through an acquisition. ABK also remains concentrated by sector and single obligor. The bank is directly and indirectly exposed to the equity market from share financing (for high net-worth individuals) and equities held as collateral for other lending. ABK is also exposed to domestic real estate, a sector that can be volatile and has seen lower prices and sales in 2016 and 1H17. Volatile growth and heightened market risk originating from the regional expansion relatively undermine risk controls.

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