Fitch Affirms Kuwait's Burgan Bank at 'A+'; Outlook Stable

17/10/2017 13:42 AST

Fitch Ratings has affirmed Kuwait-based Burgan Bank's (BB) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. The bank's Viability Rating (VR) has also been affirmed at 'bb'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRs, SUPPORT RATING, SUPPORT RATING FLOOR

BB's IDRs are support-driven. The Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view of an extremely high probability of support from the Kuwaiti authorities to all domestic banks if needed. This is reflected in the SR of '1' and SRF of 'A+', in line with Fitch's Domestic-Systemically Important Bank SRF for Kuwait.

Fitch's expectation of support from the authorities is underpinned by Kuwait's strong ability to provide support to domestic banks, as reflected by the sovereign rating (AA/Stable) and a strong willingness to do so irrespective of the banks' size, franchise, funding structure and the level of government ownership. This view is reinforced by the authorities' track record of support for the domestic banking system in case of need.

The Central Bank of Kuwait operates a strict regime with hands-on monitoring to ensure the viability of the banks, and has acted swiftly in the past to provide support where needed. Contagion risk among domestic banks is high (Kuwait is a small and interconnected market) and we believe this is an added incentive to provide state support to any Kuwaiti bank if needed, to maintain market confidence and stability.

The Stable Outlook on BB's Long-Term IDR reflects that on the Kuwaiti sovereign rating.

We assign Short-Term IDRs according to the mapping correspondence described in our rating criteria. An 'A+' Long-Term IDR can correspond to a Short-Term IDR of either 'F1' or 'F1+'. In the case of BB, we opted for 'F1', the lower of the two Short-Term IDR options. This is because a significant proportion of the Kuwaiti banking sector funding is related to the government and a stress scenario for the banks is likely to come at a time when the sovereign itself is experiencing some form of stress.

VR

BB continues to benefit from a fairly stable operating environment in Kuwait (48% of BB's credit exposures at end-2016) despite the economic impact of low oil prices. Kuwaiti banks are exposed to slower economic growth, but Fitch believes that the government's continuing capital spending plans will partially offset the pressures. Our assessment of the operating environment factors in BB's exposure to challenging regional markets such as Turkey (18%), Algeria (7%), Iraq (3%), Jordan (1%) and Tunisia (negligible exposure).

BB has an adequate franchise in Kuwait, underpinned by regional expansion. The bank's local and regional network and brand underpin BB's distribution capabilities, and support revenue generation, including cross-border businesses, but also deposit collection.

The bank has a strong management team, highly experienced in local and regional banking. BB's strategic objectives are consistent, balancing between domestic and regional/ international growth to achieve higher returns. However, execution is sensitive to economic cycles in less stable markets.

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