(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 National Bank of Kuwait (NBK) at ‘A+’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed NBK’s Bank Standalone Rating (BSR) of ‘a-’, Core Financial Strength (CFS) rating of ‘a-’, and Extraordinary Support Level (ESL) of Very High. The Outlook for the LT FCR and BSR remains Stable.
The two-notch uplift of the LT FCR above the BSR is based on the very high extraordinary support. The ESL takes into account the Bank’s systemic importance (as the second largest in the country), 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 strong financial capacity of the government to provide support.
NBK’s BSR is based on a CFS rating of ‘a-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The CFS reflects the Bank’s credit strengths of good capitalisation, very good asset quality and strong coverage ratios with significant buffers in place. Earnings are solid and profitability strengthened further in 2023. Potential credit vulnerabilities are linked to the concentration in borrowers as seen at all domestic banks in Kuwait. Other challenges include the small domestic banking sector and regional geopolitical risk.
The OPERA for Kuwait is ‘bbb’ (indicating modest risk). OPERA reflects the substantial financial buffer of the sovereign and its capacity to support the banking system in case of imbalances. It also reflects the economy’s limited diversification including high reliance on hydrocarbon exports, considerable policy risk in view of the continued delay to pass key laws such as the debt law and other reforms. Economic growth this year and next is expected to be satisfactory.
NBK’s risk profile is solid, with a well-managed balance sheet supported by strong buffers. There is good diversification in assets but some concentration in real estate and borrowers. Kuwaiti assets remain the core of the balance sheet; international assets represent 43% of consolidated assets but contribute a lower 24% of net profit. Approximately 3.4% of assets are in higher risk Egypt but most of the international assets are in UK and Europe. The proportion of international assets in high-rated sovereigns currently means there is no adjusted OPERA despite some exposure to higher-risk sovereigns.
Loan asset quality remains very good with only a marginal rise in NPLs seen in 2023, and the NPL ratio remains at a low level. NBK maintains very high loan loss coverage. Loan underwriting standards are considered good, and the Bank has a conservative policy of credit management. A large majority of provisions are general provisions. NBK regularly assesses the credit risk and creates provisions whenever necessary. When a facility is 100% provided for, the Bank tends to write off the NPL while retaining the right of recovery in the future. We expect the Bank to maintain good loan asset quality in 2024.
NBK’s returns improved further in 2023 as operating income increased through higher net interest income. Additionally the net interest margin widening to a good level, and was higher than peer banks, despite the Bank’s activity in lower margin blue chip corporate business in Kuwait.
The ROAA and earnings strength are considered good. The Bank has a diversified business base both domestically and internationally, providing a solid stream of core income. Retail and corporate banking operations are important contributors to earnings. NBK’s subsidiary Boubyan Bank provides access to the growing Shariah-compliant banking segment in Kuwait. NBK Group’s returns at the operating level are sound, and improved in 2023.
Liquidity remained at a comfortable level, and core customer deposits rose solidly in 2023. All key liquidity ratios are sound. Liquidity and funding is expected to remain satisfactory. Both liquidity and capital are supported through subordinated debt issuance and Tier 1 perpetual bonds.
The Bank is well capitalised with high CAR and CET-1 ratios – with both remaining stable last year – and comfortable buffers in place. Capital ratios are well ahead of the Kuwait regulatory minima (which are set at a high level). NBK has an adequate record on internal capital generation.
NBK has a leading market position across many banking products and segments in Kuwait. NBK Group’s asset base is diversified geographically, with a presence in 13 countries, but with a strong focus on MENA. International subsidiaries, particularly its Egyptian subsidiary NBK Egypt, are a source of enhanced risk but offer greater long-term asset growth potential than Kuwait.
Rating Outlook
The Stable Outlook indicates that NBK’s ratings are likely to remain unchanged over the next 12 months.
Rating Dynamics: Upside Scenario
As the LT FCR is already at the same level as the sovereign, the likelihood for an upward revision in that rating or the outlook is currently not possible unless there were to be an upward revision to the sovereign rating or its outlook. As financial metrics remain generally strong and the resulting CFS remains at a high level, improvement in this rating is not seen as being likely over the next year.
Rating Dynamics: Downside Scenario
A downgrade in ratings could result from a weakening of the Bank’s financials, particularly loan asset quality and/or capital. This would place downward pressure on NBK’s CFS and therefore the BSR. If the operating environment was to deteriorate, OPERA might come under pressure; should it be reduced, the ratings would be likely to fall. If the proportion of NBK’s asset base increased in lower-rated sovereigns, this might necessitate a (lower) ‘adjusted’ OPERA.
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With Access to Management: No
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