Fitch Affirms Warba Bank at 'A+'; Upgrades VR to 'bb-'

17/10/2017 13:27 AST

Fitch Ratings has affirmed Warba Bank's (WB) Long-Term Issuer Default Rating (IDR) at 'A+'; the Outlook is Stable. Fitch has also upgraded the bank's Viability Rating (VR) to 'bb-' from 'b+'.

The VR upgrade reflects WB's good strategy execution and improving earnings and profitability.

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

KEY RATING DRIVERS

IDRs, SUPPORT RATING, SUPPORT RATING FLOOR

WB's IDRs are support-driven. Its Support Rating (SR) and Support Rating Floor (SRF) reflect an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in WB's SR of '1' and SRF of 'A+', in line with Fitch's actual country Domestic-Systemically Important Bank SRF.

Fitch's expectation of support from the authorities is underpinned by Kuwait's strong ability to provide support to its banks, as reflected by its rating (AA/Stable) and strong willingness to do so irrespective of the banks' size, franchise, funding structure and 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. There is high contagion risk among domestic banks (Kuwait is a relatively small and interconnected market). We believe this is an added incentive to provide state support to any Kuwaiti bank if needed, in order to maintain market confidence and stability.

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

We assign Short-Term IDRs according to the mapping correspondence described in our bank rating criteria. An 'A+' Long-Term IDR can correspond to a Short-Term IDR of either 'F1' or 'F1+'. In the case of WB, 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

WB continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of low oil prices. The bank is exposed to lower economic growth, but Fitch believes that the government's continuing capital spending plans will partially offset the pressures.

WB has a nominal but growing franchise in Kuwait, with a market share of about 2% by assets at end-1H17. The bank has established a corporate-oriented business model and benefits from close links to the state due to its large shareholding by government-related entities.

The bank has a good management team, experienced in local banking. WB's strategic objectives have proven to be consistent, sustainable and articulated around domestic- and organic-led growth. Management has proven a good execution record despite high balance sheet growth.

Fitch's assessment incorporates WB's higher risk appetite relative to domestic peers. WB also remains highly concentrated by sector and single obligor. The bank is highly exposed to domestic real estate, a sector that can be volatile and has seen lower prices and sales in 2016 and 1H17. Fitch also considers the bank's acceptable risk controls.

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