Burgan Bank's KWD100m subordinated bond assigned 'BBB+' rating

The Rating is underpinned by BB's solid balance sheet, which is forecast to remain as such during the life of the bond. The proceeds from the issue of the Bond will be used by the Bank to increase Tier 2 capital for the purposes of capital adequacy under the Basel II framework and for general corporate purposes. BB, currently Kuwait's second largest conventional bank by consolidated assets, is majority-owned by Kuwait Projects Company Holding (KIPCO). KIPCO, one of the largest diversified holding companies in the MENA region, is well established and has held an effective controlling interest in the Bank since 1997.

BB's risk profile has significantly changed in recent years having acquired four MENA regional banks from KIPCO Group sister company 'United Gulf Bank' and successfully integrating them. While the Bank has become one of the most regionally diversified Kuwaiti commercial banks with a clear focus on the MENA region, the takeover of the bank subsidiaries concurrently raised the Bank's indirect risk exposure to low rated sovereigns (namely Jordan, Algeria, Iraq, and Tunisia) from an earlier negligible level.

Following a sharp increase in non-performing loans (NPLs) in 2011, mainly due to large impaired exposures in Kuwait and Jordan, NPLs declined moderately in 2012. While this recent trend is a positive development, BB's ratio of NPLs to gross loans nonetheless remained higher than the sector average and its loan-loss reserve coverage weaker. With respect to the latter, management has started to build up provisions and as a result, loan-loss reserve cover reached an adequate level at the end of third quarter 2012.

As is the case with its peers, BB faces an ongoing challenging operating environment in the domestic market, as well as in the MENA economies in which it operates in 2013. While asset quality improved in the first nine months of 2012, there is a moderate degree of risk that NPLs may resume their upward trend in part due to the economic impact of the political stand-off between the government and opposition in Kuwait. Economic conditions in Jordan also remain testing.

Liquidity as measured by key indicators remains strong and among the best in the Kuwaiti market, reflecting BB's lower share of loans in total assets combined with a larger stock of liquid assets. CI notes that a significant proportion of this liquidity is at subsidiary banks. Funding is sourced predominantly from customer deposits and these continue to grow at a healthy pace. In common with most (but not all) Kuwait banks, BB's balance sheet continues to be solidly capitalized, following a well received rights issue and a subordinated term issue in 2010. Internal capital generation is recovering on the back of improving profitability together with an ongoing low dividend payout ratio. The forthcoming acquisition of Eurobank Tekfen (subject to Turkish regulatory approval) is expected to lead to a reduction in the capital adequacy ratio but at around 15%, the level would still be sound.

Profitability at both the operating and net levels improved further in Q1-Q3 2012 aided by higher net interest and non-interest income coupled with effective cost control. While the increased contribution of the Bank's international operation to gross income testifies to the bank subsidiaries' sound performance, it also underscores the setback in profitability at the Kuwait operation in prior years. Nonetheless, gross income generation remains strong reflecting multiple sources of income, while BB's good operating profitability provides the flexibility to step up provisioning as necessary.

BB commenced operations in 1977 as a government-owned bank. In 1997, the Bank was privatized with KIPCO obtaining control. During 2007, KIPCO increased its ownership in BB to 43.01% from 33.87%, cementing BB's status as a core member of the KIPCO Group. The Bank's second largest shareholder is United Gulf Bank (17.86%) in Bahrain. Through its domestic network of 23 branches, which is supplemented by 98 ATMs, the Bank provides corporate/commercial banking as well as retail and private banking. As at end-September 2012, total assets rose to KWD5.17bn ($17.9bn) and total capital reached KWD707m ($2.45bn).