Fitch affirms National Bank of Kuwait at 'A+'; Outlook Stable

The IDRs of NBK reflect its leading domestic franchise, consistent profitability, strong asset quality, conservative risk profile, low funding costs and satisfactory capitalisation. The IDRs also reflect the extremely high probability that NBK would be supported by the Kuwaiti authorities, if required. However, negative pressure on the Individual rating would arise from: inadequately managed growth to potentially riskier markets; a significant deterioration of the Kuwaiti real estate market, to which NBK has selectively increased its exposure; or substantially weakened capitalisation.

NBK's performance has been consistently strong. Operating profits rose 12% in H107 yoy, driven by robust loan growth with stable margins, good cost efficiency and low impairment charges. NBK has successfully maintained its leading local market share, but potential further gains appear limited in a relatively small and competitive market. The bank is increasingly looking outside its local market for growth and in Q307 it announced the acquisition of 51% of the Egyptian 'Al-Watany Bank' for USD516m and a 40% stake for USD160m in 'Turkish Bank', subject to regulatory approval. Geographical expansion could provide additional revenue diversification and growth opportunities, and past expansion has been well managed. However, NBK is entering potentially riskier markets and the associated risks require careful management.

Asset quality is strong, with impaired loans a low 1.1% of gross loans with reserves coverage of 239% at end-H107. Exposure to the potentially volatile local real estate market has grown significantly to in excess of 20% of gross loans; however, asset quality and collateral coverage in the real estate portfolio remains strong and the bank states it does not expect to increase its relative exposure from current levels. Nevertheless, this will require close monitoring. Market risk exposure is low. Liquidity is good, benefiting from a strong funding profile and supported by substantial liquid assets. Funding is mainly from customer deposits, where NBK enjoys favourable funding costs from its large, diversified and stable deposit base.

Capital ratios have declined following rapid growth in loans and a H107 share buy-back of KWD132m. However, in Q307, NBK announced a rights issue of 20% of paid-up capital (KWD409m) and sold its treasury shares holding (KWD155m) back into the market, which should support capitalisation at sound levels. The Fitch eligible capital ratio was a satisfactory 15.2% at end-H107.

Established in 1952, NBK was the first local bank in the Gulf. It offers a broad range of retail and commercial banking services and has a substantial presence in the Middle East as well as in Western Europe, the US and the Far East. A group of local merchant families owns 80% of the shares.