Wednesday 28, June 2017 by Isla MacFarlane

S&P affirms ratings on National Bank of Kuwait

S&P has affirmed its 'A+/A-1' long- and short-term foreign and local currency counterpartycredit ratings on National Bank of Kuwait S.A.K. (NBK) and its 100 per cent-ownedsubsidiary National Bank of Kuwait (International) PLC (NBKI); the outlook remains stable.

“The affirmation reflects our view that NBK will preserve its strong business stability thanks to its leading position in Kuwait's conventional and Islamic banking markets as well as its niche businesses in Egypt and the UK,” S&P said. “We believe this business model, which is more diversified than that of many emerging peers, will help the group exhibit resilience in the challenging economic environment resulting from low oil prices in the Gulf and elevated political and economic risks in Egypt.

“The bank's risk-adjusted capital (RAC) ratio rose by 150 basis points (bps) to 10.7 per cent at year-end 2016, largely reflecting slower loan growth, resilient internal capital generation, and the positive impact from the sharp depreciation of the Egyptian pound. We believe that this improved level of capitalisation is sustainable over the medium term, due to the bank's ongoing robust financial performance and its modest dividend policy.

“Over the next 12 months, we expect profitability to be supported by higher interest rates and a stable cost of risk, which we expect to benefit from the already generous loan loss reserving of the loan book. We have therefore revised our assessment of capital and earnings to strong from adequate.

“Our assessment of a bank's risk position serves to refine our view of a bank's capacity to weather bank-specific risks, in comparison with banks operating in countries with similar economic risk. We now believe that the bank's risk position is adequate compared with the strong level of stress the bank would able to withstand in light of its strong capital and earnings. At the same time, we acknowledge NBK's current sound asset-quality indicators compared with peers', especially in terms of nonperforming loans (1.3%) and loan loss coverage (360%) accumulated by the bank. Therefore, when viewed together, NBK's capitalisation and risk profiles are still better than peers' and are positive factors for its stand-alone credit profile (SACP).

“The ratings on NBK also reflect its strong business position supported by its dominant position in Kuwait and its diversified business model of conventional and Islamic banking (through its subsidiary Boubyan Bank). Funding and liquidity are neutral factors to our ratings. While we note that key metrics have been historically below those of domestic peers, due to a higher reliance on shorter term bank debt, we note that funding benefits from the historically sticky nature of government-related entities' deposits, combined with ongoing shareholder support, as well as a good degree of access to debt and capital markets abroad.

"The long-term rating on NBK is two notches higher than our assessment of its SACP, reflecting our view that the bank has high systemic importance in Kuwait and that the Kuwaiti government is highly supportive of its domestic banking sector. We therefore consider that there is a high likelihood that the Kuwaiti government would provide extraordinary government support to NBK in case of need. The ratings on NBKI are at the same level as those on NBK, as we consider NBKI to be a core subsidiary.

 “The stable outlook reflects our expectation that NBK's asset quality and capitalisation will remain relatively stable, its market position strong, and its funding and liquidity relatively unchanged. We expect NBK's RAC ratio will remain between 10.5 per cent and 11.0 per cent over the next 18-24 months.

“A downgrade of NBK would require a deterioration of its SACP or a downgrade of the sovereign. The lowering of the bank's SACP appears as relatively remote, although it could be caused by an unexpected deterioration in the bank's capitalisation. Scenarios that could lead to this situation include very fast growth, especially in countries we regard as riskier than Kuwait, a much more aggressive dividend policy, and a large acquisition not funded by equity. A downgrade of the sovereign would probably be linked to significantly lower oil prices or materialisation of political risk.

“An upgrade over our two-year outlook horizon appears remote at this stage since this would require both an improvement in the bank's SACP and an upgrade of Kuwait. The former could come from a much stronger capital position, illustrated by our RAC ratio rising sustainably above 15%. As for our ratings on Kuwait, we could raise them if political reforms were to enhance institutional effectiveness and improve long-term economic diversification, if geopolitical risks fade significantly, and if prospects for the oil sector improve significantly.

“The stable outlook on NBKI mirrors that on NBK, as we consider NBKI to be a core subsidiary. Any rating action on NBK would trigger the same rating action on NBKI.” 

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