Fitch affirms Industrial Bank of Kuwait at 'A+'; outlook stable

Rating drivers and sensitivities - IDRs, Support Rating and Support Rating Floor

IBK's IDRs, Support Rating and Support Rating Floor reflect Fitch's view of the extremely high probability of support from the state of Kuwait, should it be required. This is based on Kuwait's 49% direct ownership and further 13% indirect ownership of IBK, IBK's role as Kuwait's sole development bank, the long-term government funding provided for its development activities, and the Kuwaiti authorities' long history of strong support for Kuwaiti banks.

IBK's IDRs have a Stable Outlook, reflecting the Outlook on the Kuwaiti sovereign. The IDRs are sensitive to any change in Fitch's view of the authorities' willingness or ability to support the bank. Fitch considers such change unlikely at present.

Rating drivers and sensitivities - Viability Rating (VR)

The VR reflects the bank's sound capitalisation and its secure and low-cost funding. It also reflects the bank's modest franchise, restricted activities and consequent balance sheet concentrations, in addition to pressure on asset quality.

Although capitalisation is sound, the loan book concentration means that impairment of a few of the bank's larger exposures could erode capital. Consequently, the VR is sensitive to a weakening of asset quality, if it was significant enough to affect the bank's capitalisation. There is potential for upward movement in the VR, which could arise from a sustained improvement in asset quality and a strengthening of risk management systems, and would probably require an improvement in the Kuwaiti operating environment and stronger economic growth.

As a development bank, although profitability is not necessarily the overriding consideration for IBK, the bank has a fairly good track record of achieving profits despite recent asset quality issues in the Kuwaiti market. Core net interest and fee income strengthened in 9M12 although net profit was constrained by a sharp rise in impairment charges, which absorbed around half of pre-impairment operating profit.

Loan quality weakened in 9M12, with impaired loans increasing to KD48m, almost 14% of the loan book, from KD22m at end-2011. The increase was mainly due to the impairment of two exposures, which together constitute 53% of the total impaired loan balance. Reserve coverage weakened despite the high impairment charges taken in 9M12, but remained reasonable at almost 70% of impaired loans. Because of the bank's strong capitalisation, unreserved impaired loans were at a low 7% of the bank's equity at end-9M12.

IBK is well capitalised, even when taking into account the relatively weak loan quality, with Tier 1 and Fitch core capital ratios at 41.2% and 43.7% at end-9M12. The bulk of the bank's funding comes from a 20-year subordinated loan granted by the government of Kuwait, which matures in 2027. Liquidity is sound, with government securities and interbank deposits amounting to almost 40% of the balance sheet.

The rating actions are as follows:

- Long-term IDR affirmed at 'A+'; Stable Outlook
- Short-term IDR affirmed at 'F1'
- VR affirmed at 'bb'
- Support Rating affirmed at '1'
- Support Rating Floor affirmed at 'A+'