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Rating Action:

Moody's assigns provisional (P)Baa1(hyb) rating to Tier 2 bonds of National Bank of Kuwait

05 Oct 2015

Limassol, October 05, 2015 -- Moody's Investors Service has today assigned a provisional (P)Baa1(hyb) long-term local-currency rating to National Bank of Kuwait S.A.K.P's (NBK) planned issuance of Kuwaiti dinar-denominated subordinated bonds with contractual point of non-viability (PONV) loss absorption features. NBK already carries local and foreign-currency deposit ratings of Aa3 stable, underpinned by a baseline credit assessment (BCA) of a3.

The (P)Baa1(hyb) rating assigned to NBK's Tier 2 PONV instrument reflects (1) the specific characteristics of the security being issued and its relative ranking in the liability structure of the bank; (2) Moody's view on how the Kuwaiti regulatory authorities would likely resolve an ailing bank; and (3) NBK's standalone credit profile, which underpins the BCA assigned to the bank and constitutes the anchor point for positioning the debt on Moody's global rating scale.

Moody's expects that the terms and conditions of the subordinated bonds will allow them to qualify as Tier 2 capital under the Central Bank of Kuwait's Basel III implementation.

This is the first time Moody's has assigned a rating to a Basel III-compliant subordinated debt instrument issued by a bank in Kuwait and the Gulf Cooperation Council (GCC) in general.

Please see our report "National Bank of Kuwait: First-ever issuance of loss-absorbing Tier 2 bonds in Kuwait will bolster the bank's capital ahead of Basel III deadline", which will be published later today, for further details on our rating approach and the features of this instrument.

RATINGS RATIONALE

THE FEATURES OF THE SECURITY

Moody's generally refers to the type of security being issued by NBK as "subordinated debt with loss triggered at the point of non-viability on a contractual basis" (Tier 2 PONV).

The NBK notes are dated subordinated bonds, have no coupon-skip provisions, rank senior to Tier 1 instruments and are subordinated to the depositors and general creditors of the bank. With language written directly into its contractual terms, the security absorbs losses through a permanent principal write-down at the point of non-viability, which distinguishes them from "plain vanilla" subordinated debt instruments.

More specifically, according to the terms of the Tier 2 securities rated today, the principal would be written down permanently if (1) NBK were to be instructed to do so by the Central Bank of Kuwait on the grounds of non-viability; or (2) an immediate injection of capital were to be required, without which NBK would become non-viable. The principal write-down can be either partial or full, depending on the capital shortfall.

MOODY'S EXPECTS DIFFERENT TREATMENT BY KUWAITI REGULATOR BETWEEN T2 PONV SECURITIES AND LEGACY PLAIN VANILLA SUBORDINATED DEBT

In line with the explicit loss trigger mechanism contained in Tier 2 PONV securities, Moody's generally differentiates them from plain vanilla subordinated debt on the rating scale, typically by deducting an additional notch to reflect the potentially greater uncertainty associated with timing of equity conversion/principal write-down. In most banking systems, this translates into a relative ranking where the rating of plain vanilla subordinated debt is positioned at adjusted BCA -- 1, and the rating of Tier 2 PONV is positioned at adjusted BCA -- 2, whereby Moody's adjusted BCA -- which captures the probability of default in the absence of government support -- is a proxy to the probability of the bank also reaching the point of non-viability. By positioning the rating of Tier 2 PONV securities two notches below, Moody's is effectively signaling that there is a high probability that regulators could pre-emptively impose losses on the holders of these securities before the bank reaches the so-called point of non-viability in order to avoid a bank-wide resolution.

In NBK's Tier 2 PONV case, while Moody's sees the need to differentiate between these two types of instruments along the rating scale, as per their different contractual features, Moody's has concluded, however, that the Tier 2 PONV security should be positioned closer to the BCA, more precisely at BCA -- 1, reflecting Moody's expectation that the regulator's actions and timing would differ from the resolution scenario that Moody's typically assumes elsewhere.

In contrast with Moody's expectations in most other jurisdictions, the rating agency anticipates that the Kuwaiti regulatory authorities are less likely to require the same level of burden sharing as it has seen elsewhere as a condition to providing public funds to an ailing bank, and they would rather adopt a supportive approach to banks in trouble, including the injection of public funds, if needed.

As a result, Moody's believes there is a reasonable possibility that the triggering of NBK's Tier 2 securities' write-down would more likely be upon the bank reaching a point of non-viability, as opposed to an earlier point in time. In such circumstances, the probability of default of Tier 2 PONV securities is the same as that implied by the BCA and, therefore, Moody's did not remove an additional notch from the rating to capture a possible principal write-down before the point of non-viability. Consequently, Moody's positions the rating of the security at BCA -1, with the one-notch deduction reflecting the high degree of loss severity upon default.

The positioning of NBK's Tier 2 PONV securities at BCA -- 1 is also consistent with Moody's current assessment that there is a reasonable probability that the Kuwaiti authorities would stop short from sharing the burden of recapitalization with plain vanilla subordinated debt (and more senior debt classes) and would instead bail out these creditors, if needed. This assessment is already reflected in Moody's approach of imputing at least one notch of government support in nine out of 11 outstanding legacy "plain vanilla" subordinated debt ratings in the GCC (including one rating in Kuwait). For more detail on Moody's rationale, see press release "Moody's concludes review of 12 GCC banks' subordinated debt ratings; all other ratings and outlooks unaffected", published on 18 July 2013.

THE STRONG STANDALONE CREDIT PROFILE OF NBK

NBK's standalone BCA of a3 reflects the bank's dominant position in its domestic market underpinning its resilient core profitability and robust financial fundamentals, including (1) consistently good asset quality metrics, with a non-performing loans-to-gross loans ratio of 1.5% at year-end 2014; (2) strong capitalisation, with a Basel III common equity Tier 1 ratio at 13.3% for the same period; (3) and strong liquidity. The standalone rating also takes into account some concentrations on both sides of the bank's balance sheet and the limited geographic diversification for the bank's rating level. Furthermore, although asset quality has been on an improving trend in Kuwait, potential protracted low oil prices will negatively affect business confidence and asset prices in Kuwait and may put some renewed pressure on the bank's domestic asset quality.

Moody's issues provisional ratings in advance of the final sale of securities, and these ratings only represent Moody's preliminary opinion. Upon a conclusive review of the transaction and associated documentation, Moody's will endeavour to assign a definitive rating to the Tier 2 bonds.

WHAT COULD CHANGE THE RATING UP/DOWN

The assigned rating is notched from the a3 adjusted BCA of NBK and further movements will be contingent on the changes to this reference point. This might occur as a result of any strengthening or weakening in NBK's credit fundamentals. Should Moody's assess a shift in the approach to resolution of ailing banks in Kuwait towards more burden sharing that would lead to a reduction in the rating agency's support considerations for plain vanilla subordinated debt in the country, the assigned rating for PONV Tier 2 obligations could be downgraded.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

NBK is headquartered in Kuwait City. The bank reported total assets of KWD23 billion (approximately $76 billion) as of 30 June 2015.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Alexios Philippides
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

Sean Marion
Managing Director
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 assigns provisional (P)Baa1(hyb) rating to Tier 2 bonds of National Bank of Kuwait
No Related Data.
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