(MENAFN- Capital Intelligence Ltd) 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 Ahli United Bank B.S.C. (AUB) at ‘A-’ and ‘A2’, respectively. At the same time, CI Ratings has affirmed AUB’s Bank Standalone Rating (BSR) of ‘bbb+’. The Outlook for the LT FCR and BSR remains Stable.
AUB’s Extraordinary Support Level (ESL) has been raised to High, from Moderate, following its acquisition by Kuwait Finance House (KFH; rated ‘A’/‘A1’/Stable) via a share swap on 2 October 2022. The new parent KFH is deemed to have the capacity and willingness to provide a high degree of support to the Bank in case of need. This is underpinned by KFH’s still significant Kuwaiti government ownership (despite a dilution to 38.4% following AUB’s acquisition), as well as its systemic importance in Kuwait as the second largest bank in terms of assets after the AUB acquisition. However, as AUB’s LT FCR is already well above Bahrain’s sovereign rating (‘B+’/‘B’/Stable), the revision of the ESL does not provide any additional uplift to the Bank’s current rating. AUB’s FCRs are currently not capped by Bahrain’s sovereign credit ratings because the bulk of consolidated assets, funding and earnings are derived from outside Bahrain, notably through the subsidiaries AUB Kuwait (AUBK; rated ‘A+’/‘A1’/Stable), AUB United Kingdom (AUBUK), as well as from other highly rated GCC countries. Exposure to Bahrain was limited to 17% of consolidated assets. In CI’s opinion, it is unlikely that AUB’s debt repayment capacity would be impaired by Bahraini transfer and convertibility restrictions were they to be introduced.
The Bank’s BSR is currently derived from a Core Financial Strength (CFS) rating of ‘a-’ and an adjusted Operating Environment Risk Anchor (OPERA) of ‘bbb-’, which is higher than the OPERA of Bahrain (‘b+’) due to the Bank’s substantial exposure to operating environments in lower risk countries, particularly through subsidiaries. The CFS rating is supported by the Bank’s geographically diversified balance sheet and revenue streams, conservative and stable management, and strong loan asset quality. Also supporting the CFS are sound liquidity and customer deposit funding base, high capitalisation and strong profitability at all levels (despite the Covid-related decline in 2020). In common with almost all other GCC banks, AUB’s CFS is constrained by the concentrations seen in customer deposits and loans, relatively high credit exposure to the real estate sector, and the challenging operating environments across geographies.
AUB has developed a successful business model focused on corporate banking (conventional and Islamic) whose resilience has been firmly demonstrated. A stable and experienced management team following conservative credit and investment policies has enabled the Bank to navigate ongoing economic headwinds. Notwithstanding the change in ownership, management continuity is assured on the grounds of their strong track record. A well-executed business strategy has successfully diversified the balance sheet and earnings away from the small Bahraini economy. This has gained the Bank a significant Shari’a compliant business franchise in the wealthy Kuwaiti market through AUBK, as well as presences in the UAE, UK, Oman, Egypt, Libya and Iraq (exposure to the latter two is very limited). Although the balance sheet has a regional focus, this is a function of AUB’s GCC-based business model.
The Bank’s consistently sound asset quality is a key credit strength. While NPLs remained relatively stable in 2021, Covid-related forbearance measures for retail loans may have masked the extent of underlying deterioration. We expect therefore retail NPLs to advance in the current year following the recent expiry of forbearance measures in Bahrain and Kuwait. However, the magnitude of any increase is likely to be manageable given AUB’s limited exposure to retail lending and sound credit underwriting standards. Crucially, the strong and more than full level of loan-loss reserves (LLRs) provides an effective buffer against potential new impaired loans.
Given the emphasis on corporate banking in the GCC, AUB is exposed to a significant degree of borrower concentration. While in our view this factor is a credit weakness, the risk profile of the largest 20 customers is deemed relatively low since a majority are sound Kuwaiti corporates with successful track records. That said, CI would view any meaningful growth in retail lending positively given the significant risk diversification benefits. The concentration in the real estate sector is also a credit challenge; these loans are spread mainly across Kuwait and, to a lesser extent, Bahrain and UK (London) markets. AUB’s credit policy stresses fully secured real estate loans with a low loan-to-value (LTV) ratio, backed by income generating assets registered in the name of the Bank.
AUB’s good liquidity – including sizeable HQLA – remains a rating supporting factor. Liquidity is underpinned by customer deposit funding, as well as a growing proportion of lower cost retail and CASA funds. Investment grade bonds continue to dominate HQLA and complement cash and balances with central banks. Although the bond portfolio is reasonably diversified across economic sector, there is some concentration in regard to issuer and geography. The bonds constitute an important liquidity reserve as they may be used as acceptable collateral for repurchase agreements in response to changing liquidity requirements. The Bank has also built up a well-diversified repo portfolio to adhere to net stable funding ratios (NSFR).
The concentrated customer deposit base is a rating constraint, although concentrations have reduced. This risk factor is partially mitigated by the GCC government/quasi-government nature of the depositors (largely Kuwaiti). Historically, these deposits have been relatively stable, although balances can fluctuate periodically depending on governments’ own liquidity needs. The financial strength of the Kuwaiti government allays concern to a significant degree over funding concentration risk. AUB has good access to the capital markets. During July 2022, the Bank concluded an oversubscribed landmark 3-year USD1.1bn Murabaha facility.
The Bank’s strong capitalisation and leverage are important credit strengths. In 2021, the Kuwait subsidiary AUBK raised USD600mn AT1 capital in the form of Basel III compliant Perpetual Sukuk through an oversubscribed issue. The proceeds are allocated to support AUBK’s future financing and investment growth plans. AUB’s total CAR includes a significant CET 1 component and provides a good buffer against unexpected credit losses. Furthermore, the Bank’s capital flexibility has been continually good despite a negative internal capital generation rate in 2020, largely due to the effects of Covid. All of AUB’s operating subsidiaries remain well capitalised, with key ratios remaining significantly above regulatory requirements.
The consistently strong and resilient operating and net profitability – notwithstanding a dip in 2020 due to one-off Covid-related provisioning requirements – is considered a key credit strength. AUB’s solid operating income generation capacity, combined with excellent cost control and low cost of risk, underpins bottom line profitability. Although operating income is skewed towards net interest income, revenue streams benefit from a geographically diversified asset base, multiple business segments and strong net interest margin. The quality of AUB’s earnings is considered to be good as the bulk of revenue is derived from recurring interest income and, to a lesser extent, fee and commission income. However, non-interest income has demonstrated a moderate degree of volatility. Going forward, we expect operating profit to remain very sound and able to withstand possible larger provisioning requirements if necessary.
The Outlook for both the LT FCR and BSR is Stable, indicating that the ratings are unlikely to change over the next 12 months. This reflects our view that AUB’s credit risk profile will more than likely be maintained at the current level, notwithstanding potential economic headwinds and ongoing geopolitical tensions.
Rating Dynamics: Upside Scenario
We do not expect a change in the LT FCR since the rating is already significantly above Bahrain’s sovereign rating. Although the Kuwaiti government remains the largest single shareholder in KFH, its stake has been diluted after AUB’s acquisition. The Kuwaiti government has a solid track record of providing assistance to banks in case of need and, moreover, its financial capacity to provide support remains very strong as indicated by the sovereign ratings of ‘A+’/‘A1’/Stable.
Rating Dynamics: Downside Scenario
While not our current expectation, the Bank’s LT FCR and BSR (or Outlook) could be lowered should the proportion of assets, funding and revenue generated in Bahrain (as well as other higher risk economies) rise significantly from current levels. The ratings could also be lowered in the event there was any significant deterioration in AUB’s currently strong key metrics.
Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: firstname.lastname@example.org
Secondary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: email@example.com
Committee Chairperson: Rory Keelan, Senior Credit Analyst
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