Fitch Ratings has affirmed Ahli United Bank’s (AUBK) long-term Issuer default rating (IDR) at A- with a stable outlook, short-term IDR at F2 and viability rating (VR) at bbb-.
AUBK’s IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support from the Kuwaiti authorities, if needed, given the government’s strong supportive stance towards the domestic banking system. The state of Kuwait (mainly via the Public Institute for Social Security) holds a 13.3% stake in AUBK, in addition to an 18.5% stake in AUBK’s majority shareholder Ahli United Bank, Bahrain (AUB; ‘BBB+’/Stable).
As the bank’s IDRs are at their Support Rating Floor, the IDRs, the Support Rating and Support Rating Floor would be sensitive to a change in Fitch’s view of the Kuwaiti sovereign’s ability or propensity to provide support.
The Viability Rating (VR) reflects AUBK’s rising profitability, asset quality indicators that typically outperform the sector as well as the benefits of management and risk control practices ensuing from being part of the AUB group. The VR also considers exposure to the domestic real estate market and high concentrations on both sides of the balance sheet.
Downside risk to the VR could arise if asset quality were to significantly deteriorate. Upside potential is limited at present in view of concentration risks but may be possible if AUBK is able to grow its franchise, while keeping asset quality under control, and reduce concentrations.
AUBK is a mid-sized Islamic commercial bank that acquired its current name upon transitioning into Islamic banking (April 2010) in the largest conversion – from conventional banking – in the region. 2011 was AUBK’s first full year of operating as an Islamic bank.
Operating profit continued to rise in 2011 and H112, supported by stronger net financing income. Subdued levels of gross financing income – reflecting modest credit growth – were offset by substantially lower funding costs. Fitch expects higher year-on-year profits in 2012, benefitting from muted upward pressure on funding costs.
Non-performing financing (NPFs) fell to 2.2% of gross financing at end-H112 and were 176%-covered by reserves (225% including collateral). Exposure to the real estate sector is significant (end-H112: 35% of gross financing) and could potentially lead to problems. The bulk of real estate is diversified amongst residential apartment buildings and commercial complexes, which had suffered less during the financial crisis. There is also significant concentration by counterparty, exposing the bank to event risk and potential high credit losses. Nevertheless, most of exposures are secured by revenue-generating collateral, which mitigates some of the risk.
AUBK is entirely funded by deposits. Customer deposits (including institutional deposits) accounted for 86% of non-equity funding at end-H112. The bank’s liquidity position is underpinned by (historically stable) deposits, and supported by interbank placements, short-term transactions with the Central Bank of Kuwait as well as lines from AUB, among other banks. The financing / customer deposit ratio declined to 80% at end-H112 (end-2011: 84%) and could fall further as the bank continues to expand its customer deposit base.
Capital adequacy is acceptable (Fitch Core Capital ratio of 18.9% at end-H112) in light of asset concentration and comfortably exceeds local minimum requirements.
Bahrain-based AUB has been AUBK’s largest shareholder since 2002. It went on to gain majority control in August 2005 and currently holds a 74.9% stake in the bank. AUB has a proven track record in regional banking, with assets totalling $29.6billion at end-H112 and presence across eight countries.