Fitch Affirms Ahli United Bank (Kuwait) at 'A+'

17/10/2017 13:32 AST

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

KEY RATING DRIVERS

IDRS, SUPPORT RATING, SUPPORT RATING FLOOR

AUBK's IDRs are support-driven. Its Support Rating (SR) and Support Rating Floor (SRF) reflect an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in AUBK's SR of '1' and 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 the 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 AUBK'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 AUBK, 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

AUBK 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.

AUBK has an adequate franchise. Fitch's assessment incorporates the benefits, via AUB-Bahrain (AUB; its parent), from a broader range of products and services and geographic footprint compared with most peers in its domestic market. AUBK is able to handle larger cross-border transactions by involving other AUB group entities and using AUB's balance sheet.

The bank has a competent management team, well experienced in local and regional banking. AUBK's strategic objectives have proven to be consistent, sustainable and articulated around corporate-, domestic- and organic-led growth. Management has proven a good execution track record.

Fitch's assessment incorporates AUBK's concentrated business model. The bank also remains highly concentrated by sector and single obligor, although this is common amongst its peers in Kuwait. The bank is highly exposed to domestic real estate relative to other banks, a sector that can be volatile and has seen lower prices and sales in 2016 and 1H17. Fitch also considers the benefits of AUBK's adequate risk controls and management from being part of AUB group.

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