Fitch Ratings – Dubai – 21 Mar 2022: Fitch Ratings has affirmed National Bank of Kuwait S.A.K.P.’s (NBK) Long-Term Issuer Default Ratings (IDR) at ‘A+’ with a Stable Outlook. Fitch has also affirmed NBK’s Viability Rating (VR) at ‘a-‘.
KEY RATING DRIVERS
NBK’s IDRs reflect potential support from the Kuwaiti authorities, if needed. This considers Kuwait’s strong capacity to support the banking system and its record of supporting domestic banks. The Stable Outlook on NBK’s Long-Term IDR reflects that on the Kuwaiti sovereign rating.
The ‘F1’ Short-Term IDR is the lower of two options mapping to a ‘A+’ Long-Term IDR as a significant proportion of NBK’s funding is related to the government and a stress scenario for NBK would likely come at a time when the sovereign itself is experiencing some form of stress.
The VR reflects NBK’s leading domestic franchise, diversified business model, resilient asset quality, diversified earnings, good capitalisation and strong funding and liquidity. The VR also considers high loan concentration by sector and obligor, albeit lower than local peers, and exposure to riskier markets than Kuwait (Egypt and Bahrain). The ‘a-‘ VR is assigned above the ‘bbb+’-implied VR due to the following adjustment reason: Business Profile.
Government Support: Fitch considers Kuwait has a strong ability and record of supporting domestic banks. NBK’s ‘a+’ GSR is one notch above Fitch’s domestic systemically important bank GSR of ‘a’ for Kuwait given NBK’s flagship status in Kuwait.
Recovering Operating Environment: Pressures from the pandemic and lower oil prices have faded owing to the support of the Kuwaiti state and higher oil prices. Kuwaiti banks’ credit profiles will remain resilient in 2022, supported by a sound regulatory framework, government spending and mild credit growth. Pressure may come from NBK’s exposures to more volatile markets in Egypt or Bahrain.
Leading Franchise: NBK has a leading franchise in Kuwait, with a market share of 33% of total sector assets at end-1H21 (including its 60%-owned Kuwaiti Islamic subsidiary Boubyan Bank K.S.C.P.; A/Stable/bbb-). The bank’s large size, branch network, distribution capabilities, strong client relationships, high expertise, good brand, reputation and long-established geographical footprint provide NBK with clear competitive advantages.
High Concentration: NBK has high single-obligor concentration. However, this is alleviated by appropriate underwriting standards and lending to high-quality groups. Lending to the commercial real-estate sector is high but backed by adequate loan-to-value ratios. Consumer lending is substantial and subject to strict regulatory caps and salary assignment.
Sound Asset Quality: NBK’s impaired loans ratio declined to 1% at end-2021 on the back of write-offs, strong loan growth and improving credit quality but remains exposed to weaker economies in Egypt and Bahrain. NBK’s strong franchise helps it underwrite lower-risk borrowers. Reserve coverage is high, mitigating the risk of high loan concentration.
Recovering Profitability: Net income recovered in 2021 (up 47% yoy) but remained below pre-pandemic levels. Lower interest rates weighed on earnings, but this was offset by higher non-interest income and lower impairment charges. Fitch expects profitability to recover further in 2022, supported by higher loan growth and expected interest rate hikes.
Adequate Capitalisation: NBK’s common equity Tier 1 ratio was adequate at 13.3% at end-2021. Consistent internal capital generation, moderate growth, strong ability to raise capital if needed and high loan loss allowances underpin NBK’s capitalisation.
Strong Funding and Liquidity: NBK is largely financed by customer deposits (75% end-2021). Reliance on wholesale funding is increasing but remains below peers. Deposit stability and a healthy liquidity coverage ratio (LCR; 153.5% end-2021) underpin NBK’s liquidity.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
NBK’s Long-Term IDR would be downgraded following a downgrade of its GSR. The latter would likely stem from either a weaker ability by the sovereign to support the bank, reflected in a Kuwaiti sovereign downgrade, or a weaker propensity to support, but in Fitch’s view this is unlikely, given the strong record of supporting domestic banks.
A sustained deterioration of the Kuwaiti, broader GCC and Egyptian operating environments or expansion into higher-risk markets (including a material increase of credit risk exposures in Bahrain and Egypt) would weaken NBK’s business model and lead to a downgrade of the bank’s VR. Weakening financial metrics versus large or flagship peers in the region could also lead to a downgrade of the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of NBK’s Long-Term IDR could come from an upgrade of its GSR. The latter would likely stem from a stronger ability to support, reflected in a Kuwaiti sovereign upgrade. This could happen if we see evidence that Kuwait’s institutions are able to tackle long-term fiscal challenges, for example, through actions to implement a clear deficit reduction plan that is resilient to lower oil prices.
An upgrade of NBK’s VR is unlikely in the near term given its current high level.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The global medium-term note programme’s and issuances’ senior unsecured long- and short-term ratings under NBK SPC Limited are rated in line with and driven solely by NBK’s IDRs. This reflects Fitch’s view that default of these senior unsecured obligations would reflect a default of the bank in accordance with Fitch’s rating definitions.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The programme’s and issuances’ senior unsecured ratings are subject to the same negative sensitivities as NBK’s IDRs. A downgrade of NBK’s IDRs would lead to a downgrade of the programme’s and issuances’ ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The programme’s and issuances’ senior unsecured ratings are subject to the same positive sensitivities as NBK’s IDRs. An upgrade of NBK’s IDRs would lead to an upgrade of the programme’s and issuances’ ratings.
VR ADJUSTMENTS
The Business Profile score of ‘a-‘ has been assigned above the ‘bbb’ category implied score due to the following adjustment reason: Market Position (positive).
The Funding and Liquidity score of ‘a-‘ has been assigned above the ‘bbb’ category implied score due to the following adjustment reason: Liquidity Access and Ordinary Support (positive)
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
NBK’s IDRs are driven by an extremely high probability of support from the Kuwaiti sovereign.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit neutral or have only a minimal credit impact on NBK, either due to their nature or to the way in which they are being managed by NBK. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg