Fitch affirms Bahrain's Ahli United Bank at 'BBB+'; outlook stable

Rating Drivers and Sensitivities: IDRs and Support Rating

The Long- and Short-term IDRs and Support Rating reflect the high probability of support for AUB from its core shareholder, if needed. The IDRs and Support Rating are constrained by Bahrain's Country Ceiling of 'BBB+'. The State of Kuwait ('AA'/Stable), through the Public Institution for Social Security (PIfSS), is the largest shareholder with an 18.5% stake. It also holds a direct stake in the bank's subsidiary in Kuwait.

The IDRs and Support Rating are sensitive to any change in Fitch's view of the ability or propensity of the core shareholder to provide support. Any upside would require an upgrade of Bahrain's Country Ceiling.

Rating Drivers and Sensitivities: VR

The bank's VR reflects its solid operating profit despite the challenging operating environment in some of its markets, sound liquidity and asset quality, and the successful expansion of its franchise. Its sources of funding are diversified. However, customer deposits are concentrated and, to a large extent, short term, but have proved stable. Its capital base is adequate at present. However, although the bank's total regulatory capital ratio is in line with regional norms, its Tier 1 ratio is somewhat below.

Upside potential for the VR is currently limited, considering the uncertain operating environment in some of its markets. Downside risk could arise if asset quality, liquidity and/or profitability were to deteriorate significantly, which is not considered likely, or if the group's Tier 1 regulatory capital ratio were seriously eroded.

Net income increased 5.9% yoy in H112, reflecting continued growth in net interest revenue, higher fee income and an increased contribution from associates. Tight cost control was maintained, but net impairment charges increased. Fitch expects future profitability to be supported by further revenue growth and impairment charges under control owing to tighter collection procedures and loan loss reserve coverage already at a comfortable level.

Impaired lending was slightly lower at 2.3% of gross loans at end-H112 (2011: 2.5%), despite socio-political unrest in Bahrain and elsewhere in the region. Loan loss coverage strengthened to 148% (2011: 135%). The loan book is somewhat concentrated but loan performance has remained sound.

Funding mainly consists of customer deposits, but the bank also relies on interbank deposits and some medium-term debt (senior and subordinated). Liquidity benefits from substantial interbank placements and a large portfolio of marketable securities.

The Tier 1 capital ratio improved slightly to 11.6% at end-H112. This is below regional norms, but reflects the bank's aim to maintain a balanced mix of Tier 1 and Tier 2 capital. The Fitch core capital ratio, which does not include the $125m of mandatory convertible preference shares issued in April 2011, stood at 9.9% at end-H112.

AUB was formed in 2000 and subsequently acquired stakes in banks in Kuwait, Qatar, Iraq, Egypt, Oman and Libya. It is also present in other Gulf/Middle Eastern countries through its brokerage subsidiary based in Kuwait, and has a wholly-owned subsidiary in the UK. Its long-term strategy is to pursue selective expansion in the Gulf/Middle East, through organic growth, mergers and acquisitions, to create a leading regional diversified financial services group. However, in the current operating environment, its main focus has been on maintaining strong liquidity, asset quality and cost control. Apart from the stake held by the State of Kuwait through PIfSS, the Kingdom of Bahrain holds a 10% stake through the Social Insurance Organisation.

The rating actions are as follows:

- Long-term IDR affirmed at 'BBB+' with Stable Outlook.
- Short-term IDR affirmed at 'F2'.
- Viability Rating affirmed at 'bbb+'
- Support Rating affirmed at '2'.
- Senior unsecured debt affirmed at 'BBB+'/'F2'.
- Subordinated debt affirmed at 'BBB'.