Fitch Ratings has assigned Boubyan Bank K.S.C. (Boubyan) a Long-term Issuer Default Rating (IDR) of ‘A+’ and a Viability Rating (VR) of ‘bb+’. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS – IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank’s IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect an extremely high probability of support from the Kuwaiti authorities, if required. Fitch believes that their ability to support the bank is underpinned by Kuwait’s (AA/Stable) strong sovereign balance sheet. The authorities’ propensity to support Boubyan is extremely high, reflective of the authorities’ track record of banking sector support and Boubyan’s systemic importance.
Support may also be forthcoming from Boubyan’s parent, National Bank of Kuwait (NBK; AA-/Stable), which owns 58% of the bank. However, Fitch believes that support would ultimately come from the Kuwaiti authorities, should it be required.
RATING SENSITIVITIES – IDRS, SR AND SRF
The bank’s IDRs, SR and SRF are sensitive to a change in Fitch’s view of the willingness or ability of the Kuwaiti authorities to provide support for Boubyan. Given the Stable Outlook on the Kuwait sovereign rating and the sovereign’s continued support for the banking sector, a change in Fitch’s view is not the base case.
KEY RATING DRIVERS – VR
Boubyan’s VR considers its limited, but growing franchise in Kuwait. The bank derives operational benefits, as well as business generation from its close link to its parent NBK.
NBK has recapitalised the bank and led the clean-up of its financing book. Boubyan’s financing book today contains relatively good quality borrowers, despite the bank’s focus on expansion. Underwriting standards appear sound, with minimal impairment charges on new business written. The bank’s fast growth of the loan book will need to be carefully managed with regards to risk, in order to ensure this does not lead to falling asset quality. Much of the bank’s loan growth has been in retail financing. As this mostly comprises salary-assigned lending, this is traditionally lower risk in the region and should not negatively impact asset quality.
The VR also benefits from the benign operating environment in Kuwait, where the economy is largely driven by government spending. Although planned spending by the government did not fully materialise in recent years, a number of major government-sponsored projects have been commissioned since 2H13. Boubyan should have good opportunities to lend to these projects, which will drive growth with relatively lower risk.
The VR also considers the bank’s weaker earnings historically, relative to peers. However, Fitch believes Boubyan’s earnings will continue to improve. This was evidenced in 1Q14, with ROAE and ROAA in line with larger peers. Fitch also believes that fast growth in risk assets will lead to moderately lower Fitch core and regulatory capital ratios, although ratios currently compare well against peers.
RATING SENSITIVITIES – VR
A sustainable increase in absolute earnings and profitability could be positive for the bank’s VR. This would boost internal capital generation and is most likely to be achieved by further growth and improvements in the bank’s franchise. The VR is sensitive to the bank’s fast loan growth, which if not managed correctly, could impact future asset quality. This would constrain the bank’s earnings and erode capital.
The VR is also sensitive to event risk given concentrations on both sides of the balance sheet. Concentrations are in line with peers and less of a concern with respect to funding due to the bank’s access to stable public sector deposits.
Boubyan Bank was established in 2004 as a full service Islamic bank. In 2009, following problems derived from lending to investment companies, NBK purchased a 40% stake in Boubyan and re-capitalised the bank. In 2012, NBK took a controlling stake in Boubyan and currently holds 58%.
Boubyan is predominantly a universal commercial bank, with its principal activities in retail and corporate banking. The bank is supported by its treasury function which manages Boubyan’s liquidity.
The bank has asset management and insurance subsidiaries. It also has minority investments in banks in Indonesia, United Kingdom and Sudan. The domestic banking operation contributes the majority of operating income to the bank.
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