United Gulf Bank – Ratings and Stable Outlook Affirmed

(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 United Gulf Bank (UGB or the Bank) at ‘BBB’ and ‘A3’, respectively. The LT FCR Outlook remains Stable. At the same time, CI Ratings has affirmed UGB’s Bank Standalone Rating (BSR) of ‘bbb-’ with a Stable Outlook. The Core Financial Strength (CFS) of ‘bbb-’ and Extraordinary Support Level (ESL) of Moderate are maintained.

The LT FCR is set one notch above the BSR to reflect the moderate likelihood of extraordinary support that UGB is expected to receive from its Kuwaiti parent Burgan Bank (BB) – the key member of the Kuwait Projects Company Holding K.S.C. (KIPCO) Group. This factor firmly underpins UGB’s credit risk profile and ratings. The Bank’s FCRs are not capped by Bahrain’s sovereign credit ratings (‘B+’/‘B’/Negative) or by CI’s assessment of Bahrain sovereign interference risk (Moderate – implying a foreign currency limit of ‘BB-’ for domestic/onshore banks). This is partially because a majority of UGB’s total assets, liabilities and earnings are derived from low-risk countries outside of Bahrain, notably Kuwait – via consolidated subsidiary Kamco Invest (Kamco) – and other GCC countries; regulatory restrictions in Bahrain limit the Bank’s links to the domestic economy. In CI’s opinion, it is unlikely that UGB would be subject to Bahraini transfer and convertibility restrictions in the unlikely case they were introduced. Extraordinary support from the Bahraini authorities is not factored into the ratings since it is uncertain whether such assistance would be provided to a wholesale bank in distress. Even if the government was willing to provide support, its financial capacity is limited, as indicated by Bahrain’s sovereign ratings.

The BSR is derived from a CFS rating of ‘bbb-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb-’, which is higher than the OPERA of Bahrain (‘b+’) due to the Bank’s substantial exposure to assets in Kuwait (sovereign ratings: ‘A+’/‘A1’/Stable) and other GCC countries. The ratings continue to be supported by the fact that UGB’s balance sheet and earnings are both largely Kuwait-based (and Bahrain exposure is very low), by good debt service record and low refinancing risk, as well as access to both market and KIPCO-related funding. Other credit strengths are the prudent balance sheet leverage and sound capital ratios. The key credit challenges are the investment banking business model and resultant dependence on wholesale funding and exposure to market movements, and the earnings volatility including weak cost efficiency. The small balance sheet and resultant concentration in assets and, to a lesser extent, liabilities is also a rating constraint.

UGB has long performed an intermediate role as an investment arm of the Kuwait-based KIPCO Group. The business model and business strategy are thus set and defined by the ultimate parent KIPCO, despite BB having recently acquired full ownership of UGB from United Gulf Holding Company BSC, another KIPCO-related company. The switch in ownership falls in line with the ongoing changes to KIPCO Group structure and does not fundamentally alter the Bank’s role within KIPCO. Due to the regulations governing wholesale financial institutions (including the inability to accept retail deposits), we expect wholesale banking to remain the mainstay of UGB’s business model. More positively, management have started to leverage BB ownership to develop cross-selling capabilities to Kuwaiti customers including offering Islamic corporate financings (via an Islamic window in Bahrain) and Shari’a-compliant treasury activities (sukuk investment). UGB expects the positive financial aspects from the change in ownership to begin to manifest in the latter part of 2025.

The geographical concentration of assets seen in Kuwait is largely a function of the Bank’s chosen business model and, crucially, its Kuwaiti parentage. Kuwait-based Kamco (CI ratings ‘BBB’/‘A3’/Stable) continues to dominate UGB’s balance sheet and to generate the bulk of revenue streams. The concentration risk factor in this regard is partially mitigated by Kamco’s sound credit risk profile. Kamco − Kuwait’s largest AUM manager – controls a substantial volume of AUM. UGB remains significantly exposed to unquoted (non-financial) equity securities. Also, as a majority of these names are group members managed by KIPCO, these assets – together with bank placements − give rise to a moderately high (although reduced in 2024) degree of related party exposure. The latter was more than matched by funding received from KIPCO-related parties, which has demonstrated stability over time. Despite investments being diversified across economic sectors, their limited number elevates concentration risk. The planned asset disposals in the current year could see concentrations decline.

UGB’s liquid asset holdings remain at a satisfactory level, although these were funded by short-term deposits received from banks and other financial institutions including related party entities. Nonetheless, although concentrated, these deposits are considered to be a fairly stable source of funds and, therefore, partially mitigate potential liquidity risk. UGB’s consolidated liabilities declined for a fifth year in a row, in line with management’s deleveraging strategy in the face of high interest rates. The bulk of debt, which remains held at Kamco, is in the form of term bank loans. The extended maturity profile is a credit strength, as this reduces refinancing and liquidity risk. Although borrowings will grow moderately in the current year as the Bank taps BB for term debt (to fund the Islamic corporate financing book under development), we expect leverage to remain at prudent levels in the short to medium term.

The liquidity policy is predicated on ensuring sufficient cash balances and cash flow to meet financial obligations as and when they fall due. UGB’s underlying liquidity is also partially supported by access to uncommitted undrawn short-term facilities from KIPCO-related entities, as well as international and MENA banks with which it has established relationships. UGB regularly tests available credit lines, including those from KIPCO Group entities. Both the liquidity coverage ratio and the net stable funding ratio are very sound and well above regulatory minima requirements.

UGB has a consistently well-capitalised balance sheet alongside a strong leverage ratio. This factor supports the ratings. The good capitalisation and buffer against unexpected losses are vital given the single-name concentrations evident in the asset base. The quality of capital remains good, with loss-absorbing CET1 funds making up the bulk of regulatory capital. The parent BB recently injected USD80mn in the form of cash (CET1 capital) after UGB repaid the USD33.1mn AT1 facility. Although capital adequacy and leverage ratios are likely to decline in the short to medium term as the financing portfolio gathers traction, CI expects capitalisation and leverage to remain sound. UGB has a significant degree of capital flexibility stemming from supportive ownership. However, the internal capital generation rate is volatile and has at times been in negative territory depending on whether the Bank was profitable or loss-making in any given year. The dividend policy is conservative and this has helped sustain capital.

Profitability at both the operating and net levels has consistently been a credit challenge for the Bank. The performance seen over time is largely a function of UGB’s investment bank business model as well as its intermediate role within the KIPCO Group. Furthermore, the concentration seen in assets (specifically Kamco’s dominance) lends itself to limited sources of operating income. Earnings quality and strength are, therefore, deemed just adequate due to the inherent volatility in investment income. This is likely to remain the case in the short to medium term, although operating income generation is expected to benefit moderately from the recent launch of Islamic financings and sukuk investments. After posting net loss in 2023 (in part Kamco-related due to weak performance of Boursa Kuwait), the Bank saw a modest net profit in 2024, with an even better performance expected in 2025 on the back of higher financing income from financings and sukuk. Risk absorption capacity is adequate, but cost efficiency remains weak.

Rating Outlook

The Outlook for 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 UGB’s overall risk profile will more than likely be maintained.

Rating Dynamics: Upside Scenario

The likelihood of an upward revision in the ratings or the outlook is limited given the wholesale nature of the business model and UGB’s intermediate role within the KIPCO Group.

Rating Dynamics: Downside Scenario

The ratings or outlook could be lowered over the next year in the event that UGB’s credit metrics or economic and geopolitical risk factors deteriorated significantly.

Contact

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

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