CI: Gulf Bank ratings affirmed with a â€˜stableâ€™ outlook
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed Gulf Bank’s (GB) Financial Strength Rating (FSR) at ‘BBB+’.
The rating is supported in particular by the good underlying asset quality and strong loan-loss reserve (LLR) coverage, by the strong CET-1 capital base and high overall capital adequacy ratio (CAR), and the sound profitability at the operating level that results from an established business franchise. The main constraining factor remains the concentration in the customer deposit base and in the loan book in terms of industry sector. However, although deposit concentration remains marked, this constraint is considerably mitigated by the governmental nature of most of the large depositors. The weak bottom line profitability is considered to be only a limited constraint in view of the strength of operating profitability and the very strong effective coverage ratio for non-performing loans (NPLs). The Outlook on the rating remains ‘Stable’ but could come under pressure should concentrations in the funding base increase.
The Support Rating is maintained at ‘1’, reflecting both the Kuwait government’s blanket guarantee of all customer deposits placed in Kuwait and the record of both the Central Bank and wider Kuwaiti government in supporting Kuwaiti banks in time of need – and its record in supporting GB in particular. The government’s record of support for Kuwaiti banks is good and it remains likely that strong official support would be forthcoming should it be required, especially in terms of liquidity. This has been reinforced by GB’s classification as a Domestic Systemically Important Bank (D-SIB). CI also affirms the Long-Term Foreign Currency Rating (FCR) at ‘A’ while the Short-Term FCR is affirmed at ‘A2’. The FCR Outlook is ‘Stable’, in line with the Outlook on the FSR.
GB performed very strongly in both 2014 and 2015 in terms of asset quality, whilst maintaining a good capital position. The latter was further enhanced in early 2016 with a substantial Tier two issue and this left GB with one of the highest CARs in the Kuwaiti banking system. This, together with a comfortable KWD liquidity position (and in a market in which raising additional time deposits should still be possible), means that GB should be well placed to selectively resume asset growth should demand allow.
Although the Kuwaiti operating environment has improved, it remains challenging and domestic political risks have increased in recent weeks following the election of a new parliament. Despite the fall in oil prices since mid-2014, the Kuwaiti government has not so far cut back on investment. On the contrary, contract awards have accelerated as long-delayed (and badly needed) infrastructure investment moved forward at a faster pace than at any time over the last five years. This should mean greater corporate loan demand and more demand for both contract guarantees and import letters of credit – and all banks would benefit if this proves to be the case. The recent election, however, has injected a degree of uncertainty. The new parliament has tilted towards an opposition which fiercely opposes even the limited austerity measures taken (and proposed) by the government. If these were to be halted – or worse, rolled back – the already high budget deficit would balloon further. This could push the government to cut back on infrastructure plans in compensation. Even if this does not happen, the new parliament is likely to be much less ready to approve new projects or contracts for existing planned developments as a way of pressurizing the government. Either way, the business environment in which the banks must operate may become less positive.
Asset quality may possibly improve. It has been publically disclosed that there are a number of large NPLs where the foreclosure process has ended. Once the required auctions for disposal of collateral have taken place, NPLs may fall and recoveries possibly increase. As regards profitability, for GB future provisioning levels remain (in theory at least) discretionary in that LLR coverage is still very strong. Subject to Central Bank approval (in a system where the latter is known to favour very strong levels of LLR coverage, with all banks building up excess general provisions), management may, therefore, be able at some point to moderate the level of provisioning and use more of operating profit to grow Tier one equity and pay further dividends. However, with a new CEO recently appointed, it is probable that strategies – and the dividend policy – will come under review.