Commercial Bank of Kuwait’s Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) 24 June 2020

Commercial Bank of Kuwait''s Ratings Affirmed
with a Stable Outlook

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Commercial Bank of Kuwait (ComBK) at ''''A+'''' and ''''A1'''', respectively. At the same time, CI Ratings has affirmed ComBK''s Bank Standalone Rating (BSR) and Core Financial Strength (CFS) rating at ''''bbb+''''. The Outlook for the LT FCR and BSR is Stable.

The three-notch uplift of the LT FCR above the BSR is based on an Extraordinary Support Level (ESL) of High. The ESL takes into account the Bank''s market position in the Kuwaiti banking sector, the Kuwaiti government''s strong track record of providing assistance to banks in the event of need, the existence of a state guarantee on all deposits placed inside Kuwait, and the very strong financial capacity of the government to provide support, as indicated by sovereign ratings of ''''AA-''''/''''A1+''''/Stable.

The affirmation of the LT FCR reflects the Bank''s financial credit strengths of excellent asset quality, specifically zero NPLs at end 2019 together with a substantial buffer with a high level of provisions, and in particular general provisions, strong capitalisation including CET-1 ratio, a good amount of liquid assets and solid profitability at the operating level. ComBK''s profitability is supported by good net interest income, reflecting its well performing loan portfolio, and a satisfactory level of fee income. The Bank has a low cost base with an impressive cost-to-income ratio.

Although the Outlook has been maintained at Stable, there could be some downward pressure going forward. This reflects the deterioration in the operating environment resulting from the coronavirus (Covid-19) pandemic, as well as low oil prices. It is expected that the weakening operating environment will place some pressure on the Bank''s financials. The operating environment and economy are highly susceptible and dependent on the price of oil and, inter-alia, on government spending in Kuwait. We expect that ComBK''s earnings will again be weak this year due to lower margins on the back of the fall in domestic interest rates together with some loan support for some clients given the current situation and as directed by authorities, lower fee income, probably higher impairment charges, and low or negative asset growth. Loan asset quality is expected to weaken due to a downturn in all business banking segments, but in particular in the corporate segment, as Kuwait''s GDP growth registers an expected decline. However, ComBK has strong buffers in place, particularly general provisions.

ComBK''s BSR is based on a CFS rating of ''''bbb+'''' and an Operating Environment Risk Anchor (OPERA) of ''''bbb''''. The CFS reflects the Bank''s credit strengths of strong capitalisation, very good asset quality and high coverage ratios together with good operating profitability. Margins are healthy and the Bank enjoys a low cost of funds.

The Bank and its management are very conservative in balance sheet management, primarily focusing on managing risk rather than growth. ComBK has a good franchise in the Kuwaiti banking sector, with defendable market positions in retail and corporate banking.

Some credit challenges are apparent, however. Net profit declined sharply in 2019 to almost nil due to higher impairment charges. This might suggest that there may not be significant room to manoeuvre this year if NPLs start to rise. However, ComBK is very conservative in its provisioning policy (and aggressive in write-offs) with a high level of general provisions in place thus providing some flexibility in the P&L if more specific provisioning was required. The complete absence of NPLs, as has been the case over the past two years, would seem difficult to maintain, and hence NPLs would be expected to be recorded at some point.

Balance sheet and loan growth has been low for some time, underlining the risk-averse nature of the Bank. Although this caution is commendable, particularly given the deterioration in the operating environment this year, and without having impacted returns at the operating level up to now, ComBK may in the future need to start accelerating growth in order to build its position domestically and help drive earnings going forward. ComBK is very much focused on the Kuwaiti market with little activities outside its home market. The local banking market is competitive and the long-term opportunity for asset growth is somewhat limited. The Bank recognises that at some point it may need to look for opportunities elsewhere. Other challenges include a high concentration in its customer deposit base, particularly connected to government or quasi-government agencies. These could come under some pressure in 2020 due to lower revenue flow throughout the economy. There is also a relatively high exposure to the real estate sector in Kuwait. Both issues are prevalent for the entire Kuwait banking sector. Other constraining factors include the susceptibility and dependency of the operating environment and economy on the price of oil and, inter-alia, on government spending in Kuwait.

Rating Outlook

The Stable Outlook indicates that the ratings are unlikely to be altered in the next 12 months. However, reflecting the challenging operating environment due to Covid-19 and the lower oil price there may be some downward pressure. Nonetheless, ComBK has strong buffers in place which supports the Stable Outlook.

Rating Dynamics: Upside Scenario

The likelihood for an upward revision in the ratings or the Outlook over the next 12 months is low given the Bank''s size and business model. Substantial improvement in profitability, liquidity and capitalisation, whilst maintaining other metrics at the current strong levels, could create some upward pressure but this is unlikely. An upgrade in the BSR would require a significant improvement in financial metrics, and particularly profitability at the net level, together with an improvement in Kuwait''s OPERA. A positive change in the Outlook is extremely unlikely in the current environment.

Rating Dynamics: Downside Scenario

Downward pressure on ComBK''s ratings or Outlook would likely occur if there were a marked deterioration in either loan asset quality or liquidity. A downgrade of the sovereign could also lead to a downward revision of the Bank''s ratings – this would probably be linked to a prolonged period of very low oil prices, although Kuwait itself is well placed among the GCC economies given its very strong financial buffers and such a revision is seen as being unlikely at this point.


Contact

Primary Analyst: Darren Stubing, Senior Credit Analyst; E-mail:
Secondary Analyst: Rory Keelan, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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