KIB’s IDRs, Support Rating and Support Rating Floor reflect what Fitch views as an extremely high probability of support being provided by the Kuwaiti authorities, if needed. Fitch’s assessment of support is based on Kuwait’s financial strength (‘AA’/Stable) and the strong track record of support from the Kuwaiti authorities for the banking system. Despite KIB’s relatively small size and lower systemic importance, it is Fitch’s view that the authorities’ support would extend to even the smaller banks in Kuwait.
KIB’s VR reflects the bank’s high exposure to the challenged real estate sector in Kuwait, high concentrations in both loans and deposits and profitability that lags its peers’. The VR also reflects the bank’s satisfactory liquidity profile and strong capital ratios.
With its roots as a specialised real estate bank, KIB is highly exposed to the Kuwaiti real estate sector (2012: 40% of the total loan book). The bank was able to reduce its non-performing loans (NPL) ratio to 8.6% at end-2012 (2011: 11.7%) due to recoveries and realising collateral. The reserve coverage ratio improved to 47% at end-2012, but remains low when compared with peers’. However, collateral coverage of NPLs (mainly in the form of real estate) is high. Fitch believes KIB’s asset quality indicators will moderately improve in 2013.
Net income increased by 21% yoy in 2012, mainly driven by improved core earnings, offset to an extent by higher loan impairment charges. The cost/income ratio improved yoy but is high compared with local and regional peers at 51%. Fitch expects the cost/income ratio to increase in the short term as the bank continues its branch network expansion, but this should pay off with an increase in revenues over the longer term.
Although improving, KIB’s deposit base remains highly concentrated, which is a common feature in the Kuwaiti banking system, with the largest depositors being government/quasi-government entities. Despite being largely contractually short-term, these deposits tend to be stable. Positively, the bank’s portfolio of liquid assets provides an adequate buffer against deposit outflows.
KIB’s capitalisation is a rating strength, with regulatory Tier 1 and Fitch Core Capital ratios of 22.5% and 28.3%, respectively, at end-2012. Despite weak reserve coverage of NPLs, high collateral coverage and KIB’s solid equity buffer somewhat mitigates high loan concentration risk but capital ratios are likely to be gradually eroded if the bank succeeds with its expansion plans.
Despite the already low level of the VR, a downgrade could be possible if asset quality were to worsen, affecting the bank’s profitability and capitalisation. An improvement in the VR would require demonstrated success of KIB’s new strategy, reduced exposure to the real estate market, and a more benign operating environment, leading to further improvement in asset quality.
Established in 1973 (as Kuwait Real Estate Bank), KIB is listed on the Kuwait Stock Exchange and regulated by the Central Bank of Kuwait. KIB offers a range of sharia-compliant retail and commercial banking products and operated a domestic network of 22 branches at end-2012.
The rating actions are as follows:
Long-term IDR affirmed at ‘A-’, Stable Outlook
Short-term IDR affirmed at ‘F2′
Viability Rating affirmed at ‘b+’
Support Rating affirmed at ’1′
Support Rating Floor affirmed at ‘A-’
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