Fitch affirms Industrial Bank of Kuwait at 'A'; Outlook Stable

IBK's IDRs and Support rating reflect the extremely high probability of support from the government of Kuwait, if required. This is based on the government of Kuwait's 49% direct ownership and further 12% indirect ownership of IBK, as well as the bank's long-term government funding arrangements for its development activities. The Individual rating reflects the bank's strong capitalisation, low cost of funding, stable profitability and adequate asset quality; it also reflects the bank's modest franchise and restricted activities.

Operating profit in H107 increased a substantial 73% yoy, driven by higher net interest income as margins widened given rising interest rates, as well as a significant recovery. Cost efficiency is satisfactory, with a cost/income ratio of 24% in H107. Asset quality is adequate; impaired loans were 3% of gross loans at end-H107. IBK takes some additional risks, such as lending to start-ups and making some venture capital investments, consistent with the activities of a development bank.

Funding is mainly from the government of Kuwait in the form of a low-cost long-term loan, mitigating any maturity mismatch. The government of Kuwait approved the enlargement of this loan to KWD300m from the previous KWD200m in Q207. The government of Kuwait also approved an additional KWD100m investment mandate for IBK to manage under Islamic principles in Q207. Liquidity is satisfactory. Capitalisation is strong, with a Fitch eligible capital ratio and the capital adequacy ratio of 42% and 64%, respectively, at end-H107.

Established in 1973, IBK is a Kuwaiti development bank providing subsidised medium- to long-term finance and commercial banking services to the local industrial sector. IBK's licence restricts it to lending only to counterparties holding industrial licences issued by the Public Authority for Industry. Subsidised lending has remained at around half of total lending in recent years.