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

17/10/2017 13:38 AST

Fitch Ratings has affirmed Industrial Bank of Kuwait's (IBK) 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

IBK'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 IBK's SRF of 'A+', in line with Fitch's actual country Domestic-Systemically Important Bank SRF.

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 IBK'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 IBK, 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

IBK continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of low 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. IBK's ability to originate new business is also sensitive to structural challenges in the industrial sector and low interest rates.

IBK's VR is highly influenced by its company profile as Kuwait's sole development bank. The bank's primary focus is the provision of concessionary medium- and long-term financing for the establishment, expansion and modernisation of private-sector industries. The bank also provides commercial banking services, mainly working capital facilities. Therefore, its risk profile differs from that of commercial banks. Nevertheless, IBK is not immune from concentration risks.

IBK's strategic objectives are mostly dictated by the policy role and public mandate of the bank. Management is stable and well experienced in the local banking sector. Execution of key objectives is constrained by the business model, lack of lending opportunities and low interest rate environment.

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