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Rating Action:

Moody's affirms National Bank of Kuwait's Aa3/Prime-1 ratings; outlook stable

Global Credit Research - 18 Apr 2013

Limassol, April 18, 2013 -- Moody's Investors Service has today affirmed National Bank of Kuwait's Aa3/ Prime -1 long- and short-term deposit ratings. At the same time, Moody's has affirmed the bank's C standalone bank financial strength rating (BFSR), equivalent to a baseline credit assessment (BCA) of a3. The Prime -1 short term rating assigned to the bank's commercial paper programme has also been affirmed. The outlook on the ratings is stable.

Today's affirmation reflects National Bank of Kuwait's (1) dominant domestic franchise; (2) consistent, above average, core profitability; and (3) robust financial fundamentals, including good asset quality metrics and strong capitalisation. The affirmation also recognises that these strengths are counterbalanced by expectations of moderate asset quality pressures, limited geographic diversification for the bank's rating level, and material industry and single-party credit concentrations.

RATINGS RATIONALE

Dominant Franchise and Robust Financial Fundamentals

Moody's says that defensibility of National Bank of Kuwait's strong domestic franchise is a key driver of the rating agency's affirmation. National Bank of Kuwait is Kuwait's largest bank and the country's leading conventional bank, commanding a market share of around 30% of consolidated system assets. The bank's size and its standing places it in a preferential position to exploit larger credit opportunities compared to its domestic peers. The bank is also a leader in the profitable retail banking sector, with the only genuine challenge to its retail franchise arising from Islamic lenders and, in particular, the similarly sized Kuwait Finance House (deposits Aa3 review for downgrade, BFSR C-/BCA baa2 review for downgrade). National Bank of Kuwait's acquisition of a controlling stake in Islamic lender Boubyan Bank (deposits Baa2 stable, BFSR D/BCA ba2 stable) in July 2012 also provides the bank a foothold in the growing Islamic banking sector. In addition to providing a growth outlet, this acquisition defends the bank against any market share attrition that results from a shift in customer preference towards Islamic banking.

Moody's says the affirmation of National Bank of Kuwait's ratings also takes into account the bank's consistency in outperforming its domestic peers, with key financial metrics comparing favourably domestically as well as against similarly rated global peers. In particular, the bank has consistently reported very high levels of core profitability, which remain a source of strength that underpins the ratings. At year-end 2012, National Bank of Kuwait's pre-provision income-to-average risk weighted assets ratio stood at 4.8%, versus an average of 4.0% for domestic banks and a global median of 2.6% for similarly rated banks. National Bank of Kuwait's strong profitability is supported by its portfolio of higher-yielding retail loans, as well as by operating efficiencies (its cost-to-income ratio stood at 28.9% at year-end 2012), resulting from a relatively small branch network (the Kuwaiti population is concentrated in the capital city), and a comparatively large asset base. The bank's income-generating capacity supports its loss-absorption buffers and internal capital generation.

As at year-end 2012, National Bank of Kuwait's Tier 1 capital adequacy ratio stood at 16.4% (and continued to compare favourably against a system average of 15.3%), despite declining as a result of the consolidation of Boubyan Bank and moderate credit growth during that year. Moody's expects that National Bank of Kuwait will maintain comfortable capitalisation metrics over the next 12 to 18 months, in line with the rating agency's view that lacklustre conditions in the domestic corporate sector will limit lending growth.

National Bank of Kuwait also continues to report good asset quality metrics despite a marked increase in the volume of non-performing loans (NPLs) during 2012. The bank's NPLs-to-gross loans ratio climbed to 2.8% in 2012 (2011: 1.6%), which is still significantly below the 5.3% average for the sector, while loan loss provision cover remained high at 152%.

Moderate Increases in Problem Loans will Exert Some Pressure Bottom-Line Earnings

The affirmation of National Bank Kuwait's ratings also acknowledges that the aforementioned credit strengths are moderated by the upward trend in the volume of problem loans and related pressure on bottom-line earnings, as provisioning charges have increased and could, in Moody's opinion, remain elevated in 2013. The bank's net income in 2012 remained stable (rising a marginal 2% compared to 2011); however, this incorporates income contribution from Boubyan Bank since the consolidation date (31 July 2012) and equity revaluation gains related to the aforementioned consolidation. Although National Bank of Kuwait maintains satisfactory risk management and asset quality pressures have remained moderate, single-party and industry credit concentrations continue to represent material constraints to the bank's ratings.

WHAT WOULD MOVE THE RATINGS UP/DOWN

Although Moody's considers that there is limited potential for an upgrade of National Bank of Kuwait's ratings in the near term, upwards pressure could be exerted on the ratings if the bank were able to (1) materially enhance its regional franchise enhance cross-border synergies, while controlling host country risks; and (2) reduce balance sheet concentrations, while maintaining strong asset quality and capitalisation metrics.

National Bank of Kuwait's ratings would come under pressure in the event that the upward trend in problem loan formation persists, thus affecting its bottom-line profitability and/or impacting capitalisation metrics.

The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

National Bank of Kuwait is incorporated in Kuwait and reported consolidated total assets of KWD16.4 billion ($58.4 billion equivalent) as of 31 December 2012, (in accordance with audited IFRS).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stathis A Kyriakides
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms National Bank of Kuwait's Aa3/Prime-1 ratings; outlook stable
No Related Data.

 

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