Fitch Ratings has affirmed Al Ahli Bank of Kuwait’s (ABK) long-term issuer default rating (IDR) at A- and Viability Rating (VR) at bb+. The outlook on the long-term IDR is stable.
ABK’s long- and short-term IDRs reflect Fitch’s view that there would be an extremely high probability of support from the Kuwaiti authorities if needed. This view is based on the bank’s high systemic importance, the government’s 20% ownership and the strong history of support for local banks from the Kuwaiti authorities.
The bank’s VR reflects its healthy profitability, adequate liquidity and strong capitalisation. It also reflects its high loans and deposits concentration, and exposure to high risk sectors which could lead to a further deterioration in asset quality as the operating environment remains weak.
Despite slow loan growth, pre-impairment operating profit remains robust and has improved in 9M11 owing to lower funding costs. However, Fitch believes that profitability could remain pressured in the short-term by high loan impairment charges. The cost/income ratio was healthy at 32% at end-9M11, but is expected to gradually increase in the medium-term as the bank expands its branch network.
The non-performing loans (NPLs) ratio weakened in 9M11. Nevertheless, ABK weathered the problems better than most peers in Kuwait. Similar to other local banks, ABK’s loan book is highly concentrated by borrower, and the bank is exposed directly and indirectly to the fragile real estate sector and local stock market. The loan book being highly collateralised somewhat mitigates the risks while pre-impairment operating profit also provides an adequate buffer against a potential increase in NPLs. Impaired loans are more than covered by loan loss reserves.
ABK’s deposit base is highly concentrated, a common feature of the Kuwaiti banking system. Despite being largely contractually short-term, these deposits tend to be stable. In addition the bank’s bond portfolio of liquid assets enables it to adequately manage liquidity.
The Fitch core capital ratio stood at a high 25.2% at end-9M11, which eases Fitch’s concerns about ABK’s loan concentration risk.
Fitch believes that the lack of political consensus in Kuwait creates some inertia in the system which ultimately hampers economic and credit growth, which in turn is delaying the banking sector’s recovery.