Sunday 26, March 2017 by Nabilah Annuar

Moody's upgrades Boubyan's long-term deposit rating to A3 from Baa1, with a stable outlook

Moody's Investors Service (Moody's) has upgraded Boubyan Bank (Boubyan)'s long-term deposit ratings to A3 from Baa1, its Counterparty Risk Assessment to A2(cr)/Prime-1(cr) from A3(cr)/Prime-2(cr) and the bank's adjusted baseline credit assessment (BCA) to a3 from baa1.

The ratings agency also affirmed the bank's ba1 BCA and its Prime-2 short-term deposit ratings. Concurrently, Moody's also changed the outlook on the bank's long-term deposit ratings to stable from positive.

Boubyan is an Islamic bank established in 2004 in Kuwait and a subsidiary of National Bank of Kuwait (NBK; Aa3 negative, a3), which acquired a 47 per cent stake in the bank in 2009 before raising it to 58 per cent in 2012.

According to a press release, the upgrade in the long-term deposit ratings reflects Moody's view that the growth in Boubyan's domestic market share strengthens its strategic and financial importance to its parent NBK and to the domestic financial system, which increases the likelihood of parental support in case of need. This has resulted in the adjusted BCA being upgraded to a3 from baa1, based on an increase in the uplift from affiliate support incorporated in the bank's ratings to four notches, from three previously.

Firstly, Boubyan's growing domestic market share in terms of financings (5 per cent as of December 2015) increases its strategic importance to its parent by supporting NBK's own market share of lending (34 per cent as of December 2015). This strategic importance is underpinned by the growth potential of Boubyan in a large Islamic banking market that represents 40 per cent of total banking assets in Kuwait at June 2016.

Secondly, the faster growth of Boubyan in recent years, compared to its parent, is increasing its importance within NBK, as evidenced by Boubyan's higher contribution to NBK's assets (14 per cent in 2016 from 11 per cent in 2012) and net income (13 per cent during 2016 from 3 per cent in 2012).

Given the systemic importance of Boubyan, our affiliate support assumptions include the support from Kuwaiti government in case of need.

Moody's affirmation of Boubyan's ba1 BCA reflects its growing domestic retail and corporate franchise, which supports its solid profitability metrics, strong capital buffers and stable funding profile. These strengths are moderated by the downside risks to the bank's asset quality, owing to its high credit concentrations combined with a relatively unseasoned financing book, following a rapid growth over the recent years. Additionally funding will need to keep pace with strong asset growth in coming years.

The bank's growing domestic retail and corporate franchise supports its solid profitability metrics, strong capital buffers and stable funding profile. Boubyan exhibits high capital buffers (18.2 per cent Tangible Common Equity (TCE) to Risk Weighted Assets), a modest market funding reliance (2.2 per cent market funding to tangible banking assets ratio at YE 2016) and high liquid resources (23.5 per cent liquid banking assets to tangible banking assets ratio).

These strengths are balanced against downside risks to the bank's asset quality, owing to high credit concentrations combined with a relatively unseasoned financing book, following a rapid growth over the recent years. Specifically, the bank's exposure to the volatile construction and real estate sectors represented 218 per cent of its TCE and 23 per cent of the financial assets at YE 2016 (local average around 29 per cent). Moreover, Boubyan's 16 per cent growth in financings during 2016 (19 per cent compound aggregate growth rate over 2012-16 compared to the 6 per cent system average) limits the seasoning of the book and poses challenges for the bank's operational and underwriting controls. These factors moderate the bank's low problem financing to gross financings ratio at 0.8 per cent as of YE 2016 (2.5 per cent local average).

While the bank currently has a strong funding profile this may come under some pressure going forward, to keep pace with the strong asset growth expected in coming years.

A hike in ratings could occur due to upwards pressure on Boubyan's ratings could develop from a combination of (1) a material reduction in credit concentrations and in the unseasoned proportion of the financing book; and/or (2) a significant strengthening in the bank's profitability and capitalisation metrics.

On the flipside, a rating reduction may be caused by a downwards pressure on the bank's ratings could develop from (1) a weakening of its strategic relationship with NBK, and/or (2) a material deterioration in the bank's asset risk or capital metrics; and/or (3) a significant weakening in the bank's funding and liquidity profile.

Moody's ratings on Boubyan are:

- Long-term deposit ratings: upgraded to A3 from Baa1, stable from positive

- Short-term deposit ratings: affirmed Prime-2

- Baseline Credit Assessment: affirmed ba1

- Adjusted Baseline Credit Assessment: upgraded to a3 from baa1

- Long-Term Counterparty Risk Assessment: upgraded to A2(cr) from A3(cr)

- Short-Term Counterparty Risk Assessment: upgraded to Prime-1(cr) from Prime-2(cr)

Outlook has been changed to stable from positive.

 

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