Capital Intelligence affirms NBK's Financial Strength Rating at 'a+'

The main factor constraining the Rating at present is the large increase in non-performing loans (NPLs) in 2012.

While the spreadsheets prepared by CI may show some apparent tightness of liquidity, this is the result of limited disclosure concerning the split between deposits by banks and those made by non-bank financial companies.

CI is confident that (in line with other Kuwaiti banks) the majority of such deposits are by non-banks and that consequently liquidity should not be a constraining factor on the Rating. For the FSR to rise, asset quality trends would need to continue to improve while other credit metrics remain good.

NBK's Support Rating is affirmed at '2'. Based on NBK's systemic importance and the government's record of support for Kuwaiti banks, it is very likely that strong official support would be forthcoming should it be required, especially in terms of liquidity.

Given the strong support factor and the 'AA-' Sovereign Rating for Kuwait, CI also affirms NBK's Long-Term Foreign Currency Rating at 'aa-' and its Short-Term Foreign Currency Rating at 'a1+'. The Outlook for all Ratings remains 'Stable'.

NBK was established in 1952 by a group of leading Kuwaiti businessmen as the country's first indigenous bank and the region's first joint stock company. NBK is one of the oldest and strongest banks in the MENA region.

The Bank's share capital is widely held by local interests, with only one shareholder controlling more than 5% (a holding of 5.04%). NBK remains the largest, private sector company by market capitalization in Kuwait. With end 2012 total assets of KD16.4bn ($58.7bn) and at more than three times the size of any other conventional (i.e. non-Islamic) Kuwaiti commercial bank as measured by assets, capital, and net profits, NBK has a leading market share in virtually all key banking segments.

With the increased ownership in and consolidation of Boubyan Bank (BB) and the widening range of products offered by NBK Capital, NBK is well placed to be able to compensate for the limited growth opportunities in the domestic market for its traditional, domestic banking products.

As well as having a dominant position in Kuwait itself, NBK is one of the most internationally represented of all GCC banks. The overseas network has become much larger in recent years following the investments in the Qatari and Turkish associates and the acquisition of Al Watany Bank of Egypt.

Although this provides NBK with stronger longer-term growth prospects and a geographically more diversified revenue base, it has come at a cost in terms of goodwill paid and lower return on average assets (ROAA) in most non-Kuwait MENA markets. Although the economic outlook in Kuwait is now more positive than a year ago, as it is also for Qatar, the performance outlook for operations in Egypt remains more uncertain.