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Fitch affirms Bahrain’s Ahli United Bank and subsidiaries’ IDRs; Downgrades AUB’s VR

Bahrain: Wednesday, September 11 - 2013 @ 10:02

At the same time, Fitch has downgraded AUB’s Viability Rating (VR) to ‘bbb’ from ‘bbb+’.

The downgrade reflects the heightened risk to the group from its 85%-owned subsidiary in Egypt (the Egyptian sovereign’s local and foreign currency IDRs are ‘B-’ with a Negative Outlook). Fitch has affirmed AUBK’s and AUBUK’s VRs at ‘bbb-’.

A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers – IDRs, Support Ratings and Support Rating Floors
AUB’s IDRs and Support Rating reflect the high probability of support from its core shareholder with an 18.5% stake in the bank, the Public Institution for Social Security (PIfSS), an arm of the State of Kuwait (‘AA’/Stable). The very strong links between PIfSS and AUB date back to before the creation of AUB and include, inter alia, PIfSS’s strong interest as a shareholder in both AUB and AUBK (12.2% stake). Nevertheless, support from PIfSS is constrained by Bahrain’s Country Ceiling (‘BBB+’) and the Stable Outlook reflects the Outlook on the Bahraini sovereign ratings.

AUBK’s IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support from the Kuwaiti authorities, if required. Kuwait has a long history of sovereign support for the entire banking system, and Fitch believes AUBK would be no exception if needed, commensurate with its position in the banking system (6% of banking sector assets at end-H113). In addition, the Kuwaiti state owns a 14.2% stake in the bank through PIfSS and the Kuwait Investment Authority.

AUBUK’s IDRs and Support Rating reflect the high probability of support from its parent, AUB, and ultimately from its parent’s core shareholder, PIfSS. AUBUK is wholly-owned by AUB and is considered a core subsidiary. As such, its IDRs are in line with those of its parent and subject to the same constraint. The Stable Outlook reflects the Outlook on AUB’s Long-term IDR.

Rating Sensitivities – IDRs, Support Ratings and Support Rating Floors
AUB’s IDRs and Support Rating are sensitive to any change in Fitch’s view of PIfSS’s ability or propensity to provide support or to any change in Bahrain’s Country Ceiling. An upward revision of Bahrain’s Country Ceiling would lead to an upgrade of AUB’s Long-term IDR by one notch. The IDRs would be downgraded if there were a downward revision of Bahrain’s Country Ceiling or if Fitch believed that PIfSS’s ability or willingness to support were lower.

AUBK’s IDRs, Support Rating and Support Rating Floor are sensitive to any change in Fitch’s view of the willingness or ability of the Kuwaiti authorities to provide support.

AUBUK’s IDRs and Support Rating are sensitive to any change in Fitch’s view of the ability or willingness of AUB to support its subsidiary. The ratings could also be sensitive to any change in AUBUK’s ownership or importance to the group, which Fitch considers unlikely.

Key Rating Drivers – VR
The downgrade of AUB’s VR to ‘bbb’ from ‘bbb-’ reflects heightened risk in Egypt, where the bank has a subsidiary with sizeable assets relative to AUB’s consolidated core capital. Egypt’s sovereign rating of ‘B-’/Negative indicates Fitch’s view that material default risk is present in the country, although a limited margin of safety remains. If AUB had to take substantial write-downs of loans and/or sovereign debt in its Egyptian subsidiary, it would have a significant impact on the group’s Fitch Core Capital (FCC) ratio. While Fitch understands that AUB has no obligation to support AUB Egypt beyond its current investment, in Fitch’s opinion it would do so given that AUB Egypt is an important long-term investment for AUB, representing a significant part of AUB’s regional strategy.

AUB’s VR reflects the bank’s solid operating profitability, despite the challenging operating environment in some of its markets, and its sound liquidity and funding base. Asset quality metrics are strong with impaired loans representing only 2.6% of gross loans at end-H113 and loan loss reserve coverage at 147%. The loan book is concentrated, but this is mitigated at group level by its geographic and sector diversification and the group’s largely highly rated investment portfolio. Corporate governance is generally a negative rating consideration in the region, although Fitch believes that this has been addressed better by the AUB group than some of the other rated banks in the region.

Customer deposits are concentrated and, to a large extent short-term, but have proved stable. AUB’s capital base is adequate, but its FCC ratio (end-H113: 11.6%) is somewhat below regional norms. However, Fitch believes that the bank would be able to raise capital if needed for expansion or to support any acquisitions.

The group is highly integrated, with common risk management, while benefiting from geographic and sector diversification. Major group subsidiaries and associates are mainly located in the Gulf Cooperation Council (GCC) and UK.

AUBK’s VR reflects the bank’s strong and rising profitability (among the strongest in the sector), sound liquidity and capitalisation, while also taking into account potential risks arising from the domestic real estate market, and high concentrations on both sides of the balance sheet. However, risks regarding real estate exposures are somewhat mitigated considering that its real estate exposures are primarily to income generating assets. Asset quality indicators typically outperform the sector’s and have remained relatively stable in recent years, compared with the deteriorating asset quality of some of the bank’s peers in Kuwait.

AUBK’s track record suggests that its underwriting standards compare well with those of other Kuwait-based banks, and benefit from being part of the AUB group and close cooperation with AUB group management. However, as is common for banks in the region, underwriting standards and corporate governance potential are hindered by greater concentration of wealth and influence, than in larger, more diversified economies.

AUBUK’s VR reflects its long track record in UK residential and commercial property finance and capable management, as well as satisfactory (and strengthening) liquidity, strong capital position and solid asset quality. The VR factors in portfolio concentration in the UK property market, particularly high-end residential real estate and commercial property. The VR also takes into account the bank’s close integration with, and importance to, the AUB group, benefiting AUBUK from both a business and risk management perspective. The VR is constrained by the bank’s small size and niche franchise, which inevitably leads to high concentrations on both sides of the balance sheet.

Rating Sensitivities – VR
AUB’s VR could be sensitive on the downside if asset quality and liquidity were to deteriorate significantly or if its FCC ratio were otherwise seriously eroded. Upside potential is currently limited, considering concentration in the loan book as well as the uncertain operating environment in Bahrain and elsewhere in the Middle East, notably Egypt.

AUBK’s VR could be sensitive to downward pressure if there were a significant deterioration in asset quality or if some of the bank’s large exposures were not to perform in accordance with their terms, e.g. through failure to amortise as scheduled or due to falls in collateral values. Upside potential is limited, in view of concentration risks, but a VR upgrade may be possible if AUBK continues to expand its franchise, while keeping asset quality under control, and reducing concentrations, at least on the asset side.

AUBUK’s VR could be subject to downward pressure if there were a material deterioration in asset quality or a significant and unexpected tightening of liquidity. Potential for the former could come from a dip in the UK property market, although loan-to-values on new lending provide some headroom. Because of the bank’s sensitivity to the health of the UK property market, there is currently little upside to the VR.

Key Rating Drivers – Subordinated Debt (AUB)
AUB’s subordinated debt is rated one notch below its Long-term IDR reflecting Fitch’s view that institutional support from its core shareholder would flow through to all senior and subordinated debt issuance, even though, as per Fitch’s criteria, subordinated debt would typically be notched down from the VR. The one notch reflects loss severity relative to average recoveries.

Rating Sensitivities – Subordinated Debt (AUB)
AUB’s subordinated debt rating is sensitive to the same considerations that might affect its Long-term IDR. In addition, it is sensitive to any potential change in Fitch’s assumptions relating to support in the Gulf for bank subordinated debt.

AUB was formed in 2000 and subsequently acquired stakes in banks in Kuwait, Qatar, Iraq, Egypt, Oman and Libya. It is also present in other Gulf/Middle Eastern countries through its brokerage subsidiary based in Kuwait and it has a wholly-owned subsidiary in the UK (AUBUK). The operations in Iraq and Libya are currently very small. The stake in Ahli Bank Qatar was sold in February 2013, but the group’s long-term strategy remains the pursuit of selective expansion in the Gulf/Middle East through acquisitions and organic growth to create a leading regional diversified financial services group.

The rating actions are as follows:
Ahli United Bank B.S.C.
Long-term IDR affirmed at ‘BBB+’; Outlook Stable
Short-term IDR affirmed at ‘F2′
Viability Rating downgraded to ‘bbb’ from ‘bbb+’
Support Rating affirmed at ’2′
Senior unsecured debt affirmed at ‘BBB+’/'F2′
Subordinated debt affirmed at ‘BBB’
Ahli United Bank K.S.C.
Long-term IDR affirmed at ‘A-’; Outlook Stable
Short-term IDR affirmed at ‘F2′
Viability Rating affirmed at ‘bbb-’
Support Rating affirmed at ’1′
Support Rating Floor affirmed at ‘A-’
Ahli United Bank (UK) PLC
Long-term IDR affirmed at ‘BBB+’; Outlook Stable
Short-term IDR affirmed at ‘F2′
Viability Rating affirmed at ‘bbb-’
Support Rating affirmed at ’2′

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Wednesday, September 11- 2013 @ 10:02 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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