Sunday 22, October 2017 by Nabilah Annuar

CI Ratings affirms Ahli United Bank at 'A', with a stable outlook

Capital Intelligence Ratings (CI Ratings), the international credit rating agency, today announced that it has affirmed Ahli United Bank’s (AUB) Financial Strength Rating (FSR) of ‘A’.

According to a statement, the rating is supported by the bank’s good loan asset quality, geographically diversified balance sheet and revenue streams, comfortable liquidity underpinned by customer deposit funding, and sound capital adequacy. Also supporting the FSR is the Bank’s strong and improved profitability at all levels. Factors constraining the FSR are customer deposit concentrations, rather high real estate loan exposure, and the increased level of credit risk in the broader region exacerbated by the fall in oil prices. CI Ratings also affirmed the Bank’s Long- and Short-Term Foreign Currency Ratings (FCRs) at ‘A-’ and ‘A2’, respectively.

These ratings are set above Bahrain’s Sovereign ratings (‘BB+’/‘B’/‘Negative’ ) given that the majority of AUB’s total assets, funding sources and earnings are derived from outside Bahrain, notably through the large Kuwait subsidiary Ahli United Bank Kuwait (AUBK: ‘A+’/’A2’/’Stable’) and, to a lesser extent, other GCC countries and the UK operation Ahli United Bank UK. The ‘Stable’ Outlook for all ratings is maintained. The Support Rating remains at ‘3’, denoting the high likelihood of support from core shareholders and official sources. In the case of the largest subsidiary AUBK, there remains in force an explicit government guarantee of customer deposits placed in Kuwait and held with Kuwaiti banks.

AUB is conservatively managed and follows prudent risk management practises. A well executed business strategy has earned the Bank successful and significant business franchises in three (Kuwait, Oman and Bahrain) of the six oil-rich GCC markets. The expansion of AUB into the UAE last year through Ahli United Bank Limited (a first Category 1 licensee GCC bank in the Dubai International Financial Centre), will enable the Bank to diversify in corporate and private banking in the UAE and broader region. The subsidiary operations in Kuwait and UK considerably diversify risk assets, funding and revenue streams away from Bahrain, where in any case exposure is limited. That said, the Bank’s balance sheet remains predominantly GCC based, reflecting the Bank’s chosen business model and strategy.

AUB continues to face a challenging economic environment within the GCC region where credit risk – particularly in the corporate sector – remains comparatively high. The sharp fall in oil prices has elevated credit risk in regional economies and at the same time, tightened liquidity conditions for most businesses. The weaker operating environment manifested itself in a higher NPL accretion rate for AUB in 2016, although the increase came from a low base. Nonetheless, AUB’s loan asset quality remains very sound with the strong loan-loss reserve cover and effective risk management being important mitigating factors.

Being primarily a corporate bank in the GCC, AUB is characterised by a rather high degree of borrower concentration − a phenomenon seen with other GCC banks. That said, almost all the Bank’s top twenty borrowers were Kuwaiti names. The credit portfolio remains adequately diversified by economic sector with the comparatively high exposure to real estate lending largely spread across Kuwait and to a lesser extent Bahrain and UK (London) markets. AUB’s credit policy towards the real estate sector is considered prudent and non-speculative in nature, with prudent loan-to-value ratios and backed by income generating assets.

The Bank’s sources of funding are reasonably diversified, supported by a deep customer deposit base and demonstrated ready access to term finance. While there remains significant concentration within the customer deposit base, these funds mainly relate to government and quasi-government entities and are viewed as being relatively stable. Over time, the growing contribution of customer deposits, particularly current and savings accounts to total funding is expected to further improve the Bank’s funding profile and cost of funding.

AUB’s liquidity remains good, despite some tightening in key metrics during 2016, underpinned by customer deposit funding. Deposits with other banks are held mostly with investment grade GCC and non-GCC (USA and Europe) institutions. AUB possesses an important liquidity reserve in its sizeable portfolio of unencumbered quoted investment grade bonds (classified as ‘non-trading investments’). These securities may be readily sold for cash or used as acceptable collateral for repurchase agreements in response to changing liquidity requirements.

The balance sheet remains well capitalised with a high Tier 1 component. The CAR increased to a very sound level in 2016 after AUBK successfully completed an USD200mn Basel 3 compliant Perpetual AT1 Sukuk. A moderate dividend policy has contributed to satisfactory internal capital generation over the years, despite the recent decline related to negative other comprehensive income.

The Bank’s already good profitability continued to improve at both operating and net levels, reflecting multiple sources of revenue derived from a reasonably diversified geographical base and product mix. Operating profitability grew further on the back of sustained expansion in gross income together with effective cost control. The improved operating profitability has strengthened AUB’s risk absorption capacity.

Although the cost of funding continued to increase, reflecting the tight liquidity conditions prevailing in GCC economies—along with stiff competition for both deposits and loans—AUB again increased NIM to a good level in H1 2017. This, in turn, benefited the Bank’s performance at the net interest income level despite the loan contraction. Although non-interest income declined in H1 2017 compared to H1 2016, this was primarily due to foreign currency translation effect and partly as a result of lower business volumes.

AUB, incorporated in Bahrain on 31 May 2000, is the name adopted for the entity formed by the merger of the erstwhile Al-Ahli Commercial Bank BSC and United Bank of Kuwait, a bank incorporated in the UK. The Bank’s universal banking business model is focused on the GCC market, and seeks to ensure that conventional—as well as Shari'ah compliant—products are provided in all countries.

Business operations are organised into four principal divisions: (i) retail banking, (ii) corporate banking, (iii) treasury and investments, and (iv) private banking and wealth management. Prominent major shareholders of AUB (over 5 per cent) include the Public Institution for Social Security, Kuwait (18.9 per cent), the Social Insurance organisation, Bahrain (10.0 per cent), and International Finance Corporation (IFC, 5.2 per cent)). As at end-June 2017 the Bank’s total assets amounted to USD32.4 billion and total capital was $3.96 billion.