Moody's affirms Warba Bank's Baa2 rating, maintains stable outlook

10/10/2017 08:35 AST

Moody's Investors Service ("Moody's") has today affirmed the long and short term local and foreign currency deposit ratings of Baa2/Prime-2 respectively of Warba Bank K.S.C.P. (Warba). Moody's also affirmed the bank's Baseline Credit Assessment (BCA) of ba3. Moody's maintained the stable outlook on the long-term deposit ratings. Furthermore, Moody's has affirmed the Counterparty Risk Assessment (CR Assessment) at Baa1(cr)/ Prime-2(cr) to Warba.

Warba's Baa2 long-term deposit ratings reflect its ba3 Baseline Credit Assessment (BCA) and Moody's assessment of a `very high' probability of government support in case of need. This reflects the Government of Kuwait's (Aa2, stable) 31% direct and indirect ownership stake and the Kuwait authorities' historical support to banks in case of need.

The bank's ba3 BCA reflects the bank's solid liquid resources and gradually improving profitability, moderated by a rapid growth and high credit concentrations, declining core capitalisation, and a concentrated funding base.

A list of ratings is provided at the end of this press release.



RATINGS RATIONALE

STANDALONE BCA

-- RAPID GROWTH AND HIGH CREDIT CONCENTRATIONS

Moody's expects Warba's asset risk metrics to remain solid into 2017, despite modest financing formation owing to oil price weakness. The lower corporate profits, reduced real estate activity and subsidy cuts resulting from low oil prices will affect borrowers' creditworthiness.

However, the bank's rapid growth in recent years - as it builds its franchise -- constrains Moody's view on its asset quality. In addition, Warba's significant sector and borrower concentrations, which reflect both its young operations and the country's limited economic diversification, also pose asset quality risks.

Furthermore, the bank's acquisition of third party portfolios in parallel of its internally generated assets poses further risk to its asset quality, given the limited control of the underwriting process.

As of December 2016, the bank's problem financings to gross financings ratio stood at 0.7% (0.9% in 2015), which compares favourably to the 2.5% Kuwait average.



-- LOW CORE CAPITALISATION

According to Moody's, Warba's core loss absorbing capacity will remain lower than peers. This reflects the low capitalisation, when adjusted for the RWA discount from which Islamic banks benefit under the local regulatory regime (on assets financed by their unrestricted profit sharing investment accounts), as well as for capital instruments unlikely to provide loss absorption ahead of failure (large AT1 issuance).

However, the rating agency expects the bank's reported regulatory capital adequacy ratio to remain solid, despite declining noticeably owing to rapid growth. This reflects the AT1 sukuk issuance completed this year, which materially increased the bank's regulatory Tier 1 capital.

As of June 2017, the bank reported a tangible common equity (excluding the AT1 sukuk) to RWAs ratio of 12% (17% at end- 2016) and a regulatory Tier 1 (including the AT1 sukuk) ratio of 21.3%. These metrics do not include the aformentioned RWA exemption reversal.

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