Standard & Poor’s Ratings Services revised its outlook on Kuwait-based Burgan Bank to stable from negative. At the same time, S&P affirmed the ‘BBB+/A-2′ long- and short-term counterparty credit ratings on Burgan Bank.
The outlook revision reflects Burgan Bank’s improving asset quality and financial performance over the past 12 months. We expect this trend to continue in 2013, allowing the bank to maintain its capitalization at current levels despite its rapid loan growth.
The long-term rating on the bank is three notches above its stand-alone credit profile (SACP), reflecting the bank’s “high” systemic importance, as our criteria define the term, and the Kuwaiti authorities’ highly supportive stance toward their banking sector.
Burgan Bank’s gross nonperforming loan (NPL) ratio dropped to 7.1% on Dec. 31, 2012, from 11.5% on Dec. 31, 2011. Although the ratio benefited to a certain extent from the increase of the denominator, owing to rapid customer loan growth in 2012, we also note that Burgan Bank continued to realize recoveries on its stock of NPLs, as shown by a decline in the absolute amount.
The bank’s capitalization dropped significantly in 2012, largely due to the acquisition of a 99.3% stake in Turkish Tekfen Bank (not rated). Burgan Bank’s risk-adjusted capital (RAC) ratio before adjustments fell to 7.5% on Dec. 31, 2012, from 9.9% the previous year. This led us to revise our assessment of capital and earnings to “adequate” from “strong,” and revise the bank’s SACP to ‘bb+’ from ‘bbb-‘.
Burgan Bank’s operating revenues have been improving over the past quarters, and we expect its internal capital generation to remain healthy despite fast-paced loan growth. We also expect management to maintain a fairly conservative dividend policy and potentially raise additional capital to maintain its current capitalization.
Burgan Bank is the third-largest bank in Kuwait in terms of consolidated assets. While its overseas activities have been growing more rapidly over recent years, its domestic franchise and market share are also increasing. We have therefore revised our view of the bank’s systemic importance from “moderate” to “high,” and we now incorporate three notches of uplift for expected extraordinary government support into our ratings.
“The stable outlook reflects our view that the bank’s healthy revenue generation and improving asset quality will mitigate risks coming from its fast balance sheet growth over the next 24 months. We also expect the bank to maintain a conservative dividend payout and raise additional capital if necessary to keep capitalization at the current satisfactory level. According to our base-case scenario, the bank’s RAC ratio before adjustments will remain above 7.5% over the outlook horizon,” S&P in a statement said.
“We might consider a positive rating action if our view of the bank’s asset quality and credit risk stemming from its rapid loan growth became more positive. A continuation of the positive trend in NPLs and higher coverage by provisions would be important triggers. A good future performance by the recent Turkish acquisition would also be positive for the ratings,” it added.
“We could consider a negative rating action if Burgan Bank allowed capitalization to deteriorate from current levels due to faster-than-expected growth, or capital retention that was not commensurate with that growth,” it said.