17/10/2017 13:35 AST

Fitch Ratings has affirmed National Bank of Kuwait's (NBK) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook.

Fitch has also downgraded NBK's Viability Rating (VR) to 'a-' from 'a' in a reassessment of the bank's financial metrics, in terms of ratios (especially profitability and capitalisation) and absolute values (especially total assets, loans, deposits and equity) against regional peers with similar ratings. The downgrade also reflects the bank's increased non-investment grade securities book relative to equity, as well as unhedged foreign currency risk from foreign subsidiaries. A full list of rating actions is at the end of this rating action commentary.

Fitch has also affirmed subsidiary National Bank of Kuwait (International)'s (NBKI) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook.

KEY RATING DRIVERS

IDRS, SUPPORT RATING, SUPPORT RATING FLOOR - NBK and NBKI

Similar to all Kuwaiti banks, NBK's IDRs are support-driven. The Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view of an extremely high probability of support from the Kuwaiti authorities to all domestic banks if needed. This is reflected in the SR of '1', and NBK's SRF of 'AA-' 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 its 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 of a strong willingness to do so. 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. Contagion risk among domestic banks is high (Kuwait is a small and interconnected market) and we believe this is an added incentive to provide state 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 are equalised with those of parent bank NBK. NBKI's Support Rating of '1' reflects an extremely high probability of support from NBK, given that the bank is a key and wholly-owned subsidiary of the group and based in a strategic market.

VR - NBK

NBK continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of low oil prices. Kuwaiti banks are 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 more than 75% of its operating income in Kuwait and its core funding is still reliant on Kuwaiti wholesale depositors.

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