Fitch affirms Kuwait International Bank at IDR 'A-'; Outlook Stable

The IDRs and Support Rating for KIB reflect the extremely high probability of support expected from the Kuwaiti authorities in case of need, based on the history of support local banks have received from the authorities during past systemic crises. The Individual Rating reflects its relatively small size and franchise, modest profitability and concentrations in financing and funding. It also reflects the positive impact on its franchise and prospects expected from KIB's conversion into an Islamic bank and satisfactory capitalisation.

Previously known as Kuwait Real Estate Bank, the bank changed its name to KIB upon conversion to an Islamic bank in July 2007. Before this, the bank operated under a restricted banking licence permitting lending for real estate purposes only. The conversion to an Islamic bank has enabled KIB to offer a full range of Islamic retail and commercial banking products. With only two Islamic banks in the domestic market, the conversion should benefit the bank's franchise.

KIB's profitability was adversely impacted by the conversion process with new business subdued and non-Shari'ah-compliant business run down. New staff were recruited to aid with the conversion process. This is reflected in a 37% yoy decrease in pre-impairment operating profit to KWD15m in 2007. Fitch expects profitability to improve as the bank focuses on expanding the business.

KIB's financing portfolio remains dominated by real estate financing. Given rapid appreciation in property prices in Kuwait, the concentration of exposure to this sector is a cause for concern although the reliance on property should decline. Asset quality improved in 2007 but remains weaker than the bank's peers, with impaired loans representing around 10% of gross loans at end-2007.

Funding is mainly from customer deposits. The bank started attracting Islamic deposits upon conversion and this should lead to an improvement in funding costs. KIB manages liquidity through short-term 'Murabaha' transactions with banks and through commodity 'Tawarruq' transactions with the Central Bank of Kuwait. KIB is adequately capitalised with a Tier 1 ratio of 16.1% at end-2007.

Established in Kuwait in 1973, KIB has domestic market shares of around 3% each in loans and deposits. At end-2007, three local Kuwaiti enterprises each held stakes of up to 5% in the bank, with the outstanding shares widely held.