The Support Level is ‘3’, reflecting the high likelihood of support from KIPCO. UGB’s Financial Strength Rating (FSR) is maintained at ‘BBB’.
The ratings are underpinned by improved leverage and strong debt repayment record, sound capital base, and low level of impaired assets.
Factors constraining the ratings are the significant asset and income concentrations, tight liquidity, dependence on market sources of funding, still low profitability and earnings volatility. The Outlook for the Ratings remains ‘Stable’.
UGB is a member of the diversified and well respected KIPCO Group in Kuwait. In exchange for the successful completion of the sale and transfer of four MENA regional commercial banks to Kuwait-based Burgan Bank (BB, also KIPCO majority owned) in 2010, UGB acquired a strategic stake in BB.
While UGB’s strategic equity investment in BB has culminated in concentration risks, it should be noted that BB has a high credit rating (‘A-‘) and is a systemically important institution in Kuwait. BB’s shares are listed on the Kuwait Stock Exchange and thus represent an important source of potential liquidity for the Bank.
UGB’s sources of funding remained adequately diversified and supported by ample medium-term finance. Although there remains some reliance on short-term interbank deposits (mainly from other KIPCO group entities which channel liquidity on an arm’s length basis) this source of funds has proven to be stable, with BB likely to remain a source of funding over the foreseeable future.
The Bank has successfully paid down debt in recent years and significantly improved leverage. Although the level of liquid assets remains very low in relation to total assets, UGB has adequate liquidity to repay maturing short-term debt obligations including the very limited customer deposits. Capital adequacy is sound and provides an adequate buffer against unexpected losses. The contribution of total capital to total funding has increased markedly over the years due to the deleveraging exercise.
The difficult global and regional financial markets in recent years had forced UGB to step up provisioning for impaired assets and this has impacted net profitability. Although the provision charge declined in 2012, it continued to negatively impact the bottom line. Nonetheless, profitability at both the operating and net levels recovered on the back of higher share of results from associates and an increase in fee and commission income.
UGB was established in 1980 in Manama, Bahrain and in 1988 it became a subsidiary of KIPCO, which currently owns 95.83% of UGB’s shares. As a wholesale licensed bank, the Bank provides asset management, treasury, corporate finance and selective commercial banking services. UGB manages its investments through a combination of in-house and independent portfolio managers. At end 2012, the Bank’s total assets were $1,226m and total capital was $478m.
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