Fitch affirms National Bank Of Kuwait at 'A+'; downgrades Individual rating to 'B'

Simultaneously, Fitch has affirmed NBK's Long-term Issuer Default rating (IDR) at 'A+' with Stable Outlook, Short-term IDR at 'F1', Support rating at '1' and Support Rating Floor at 'A+'.

The downgrade of NBK's Individual rating reflects the negative effect the Q407 USD1bn 98% acquisition of Al-Watany Bank (AWB) has had on the bank's risk profile, though this remains conservative. AWB is based in Egypt ('BB+'/ Positive), a potentially riskier market to operate in than Kuwait ('AA-' (AA minus)/ Stable), where the substantial majority of NBK's activities are based. The downgrade also reflects NBK's significant, albeit declining, property lending (end-2007: 19% of gross loans), though this is comfortably covered by collateral.

NBK's IDRs reflect its leading domestic franchise, consistent profitability, strong asset quality, low funding costs and strong capitalisation. The IDRs also reflect the extremely high probability that NBK would be supported by the Kuwaiti authorities, if required.

NBK's performance has been consistently strong. Operating profits rose 8% in 2007 to $1.05bn, driven by rapid loan growth (2007: 37%), good cost efficiency (2007: cost/income ratio of 27%) and low impairment charges reflecting strong asset quality. While NBK has been successful in maintaining its leading local market share, further gains appear limited in a relatively small market. NBK has thus expanded geographically; this should provide further revenue diversification and growth opportunities, but exposes NBK to some additional risks.

Impaired loans rose $245m in 2007, mainly due to the acquisition of AWB, but these were a low 2% of gross loans at end-2007 with comfortable reserves coverage of 167%. Market risk exposure is low, with no exposure to structured credit markets. Liquidity is good. Funding is mainly from customer deposits; NBK enjoys favourable funding costs from its large, well diversified and stable local deposit base. Capitalisation is strong, despite rapid loan growth, with a Fitch eligible capital ratio of 20% at end-2007.

Established in 1952, NBK was the first local bank in the Gulf. A group of local merchant families owns 80% of the shares. 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.