Fitch Ratings has affirmed Al Ahli Bank of Kuwait’s (ABK) long-term issuer default rating (IDR) at A- with a stable outlook and its viability rating (VR) at bb+.
ABK’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s view that there is an extremely high probability that the Kuwaiti authorities would support the bank, if needed.
“This view is based on the financial strength of Kuwait (‘AA’/Stable), the authorities’ strong track record of support for Kuwaiti banks, and ABK’s importance within the domestic banking system,” Fitch in a statement said.
These ratings are therefore sensitive to a rating action on the Kuwaiti sovereign rating, or a change in Fitch’s assumptions around the propensity for the Kuwaiti authorities to provide timely support to the bank.
The affirmation of the VR reflects ABK’s strong capital position, healthy impairment reserve coverage and resilient earnings generation in a challenging operating environment, while also considering the high concentrations in ABK’s loan portfolio and customer deposit base.
In 9M12 ABK’s net income declined 24% yoy, driven by a 70% yoy increase in loan impairment charges, mainly due to general provisions. Earnings generation was otherwise healthy, with a 9% yoy improvement in pre-impairment operating profit, underpinned by net interest income growth and solid cost containment. Fitch expects profitability to remain under pressure in the short term, but will eventually improve as impairment charges normalise.
Fitch notes that about 45% of ABK’s loan portfolio is exposed to more volatile economic sectors, such as investment companies and construction and real estate – a common feature of the Kuwaiti banking sector. In 9M12, the non-performing loan (NPLs) ratio decreased to 3.4% (2011: 4.2%) following the restructuring of investment company exposures which are now performing according to the revised terms. Reserve coverage is strong at 187%, boosted by a large stock of general reserves.
ABK reported regulatory Tier 1 and Fitch Core Capital ratios of 24.2% and 27.5%, respectively, at end-9M12. Fitch views ABK’s capitalisation as strong, and is the highest among its Kuwaiti peers’. The Fitch calculated loans/deposits ratio was 109% at end- 9M12 (85% when including non-bank financial institution deposits as per Central Bank of Kuwait (CBK) guidelines). The bank’s liquidity profile is comfortable, with liquid assets (consisting of cash and bank placements, investment securities and Kuwaiti government and CBK bonds) amounting to 31% of total assets. ABK is largely funded by stable customer deposits (end-9M12: 80% of non-equity funding).
Upside potential on the VR could arise from better diversification in the loan portfolio, stability in the bank’s NPL formation and a normalisation in impairment charges which in turn would improve ABK’s overall profitability. Downside pressure on the VR would result from deterioration in the domestic operating environment, if it were to impact ABK’s risk indicators and erode capital from its current healthy level.