Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Ahli United Bank Kuwait’s (AUBK) Financial Strength Rating (FSR) at ‘A-’, on ‘Stable’ Outlook, in view of its strong asset quality, good capital adequacy, comfortable liquidity and sound profitability.
The management support accruing from Ahli United Bank (AUB) ownership is also a supporting factor.
The FSR is constrained by significant customer deposit and financing concentrations (although this is to an extent systemic), the sector concentration in real estate, slightly lower than average non-financing income level, and the challenging operating environment exacerbated by a sharp fall in the oil price.
The Bank’s ‘1’ Support Level is maintained in view of the Kuwait explicit government guarantee of customer deposits held with banks in Kuwait, which remains in force, as well as the high likelihood of official and shareholder support in case of need.
The ability and willingness of official supporters to provide sufficient and timely support is assessed extremely strong by CI. On this basis, AUBK’s Long-Term Foreign Currency (FC) and Short-Term FC Ratings are affirmed at ‘A+ and ‘A2’, respectively, on ‘Stable’ Outlook.
AUBK is the largest member of the AUB group and a beneficiary of managerial and product support mechanisms available from its Bahraini parent. Management is well regarded and follows a sound business strategy. Since its conversion to an Islamic bank (in 2010), AUBK has continued to successfully grow both its customer deposit base and financing portfolio. Effective risk management has bestowed the Bank with a strong balance sheet, and this is clearly evidenced by the low ratio of non-performing financings (NPFs) to gross financings, which remains below the Kuwaiti sector average. Moreover, financing-loss reserves continued to provide more than full cover for NPFs, notwithstanding the steady decline in the coverage ratio.
Although AUBK’s borrower concentrations have reduced in recent periods, there remains a rather high degree of concentration risk with respect to financing customers, which in turn elevates the credit risk. There is also a significant level of real estate sector concentration risk in the financing portfolio, a phenomenon seen across other (but not all) Kuwaiti banks, despite a small decline in both money and percentage terms in third quarter of the current year. That being said, it is worthy of mention that being an Islamic bank a significant proportion of AUBK’s financings are backed by assets, typically real estate. Crucially, the bulk of collateral comprises revenue-generating properties (built and occupied), with a large share of residential real estate assets, mostly registered in the name of the Bank. AUBK has no material exposure to the challenging high-rise commercial (office) real estate sector in Kuwait.
Historically, AUBK’s customer deposit base has been concentrated, as is the case with other Kuwaiti banks, signifying the large amounts of deposit funding from the oil sector and government or semi- governmental entities. Although these deposits are deemed stable given the Kuwait government remains the largest depositor in the banking system, they do elevate liquidity and funding risks for the Bank and the system as a whole. The sharp decline in the oil price and consequent significant fall in Kuwait government revenue may see some of these entities draw down their deposits in the medium term and/or competition from newly issued government debt. Nonetheless, in the first nine months of 2015, the customer deposit base continued to grow at a healthy, albeit reduced, pace. Liquidity ratios also remained good as credit expansion slowed further in the current year. AUBK has a significant share of high grade liquid assets in the asset base.
The balance sheet remained well capitalised, despite a further decline in the capital adequacy ratio (CAR) due to growth in risk weighted assets. The CAR was on par with the average for the local market, and continued to have a high Tier 1 component. The Bank’s sound net profitability combined with a rather moderate dividend payout has produced a good rate of internal capital generation.
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AUBK’s profitability as measured by the ROAA (return on average assets) remains sound and is the best among Kuwaiti Islamic banks, notwithstanding a decline due to lower operating profitability. Having recorded just marginal growth in 2014, the Bank’s operating profit slipped in the first nine months of 2015 due to the ongoing effect of a narrowing profit sharing margin and a drop in non-financing income. The latter was mainly due to the absence of gains on sale of investment properties (which had been the case in the prior period). Keen and increasing competition in Islamic banking has pushed up AUBK’s cost of funds over the last few years and this, in turn, has resulted in some margin compression. Looking ahead, management projects an improvement in the profit sharing margin as it continues to build its branch network and widens the range of Shari’a compliant retail products and services.
AUBK’s predecessor ‘Bank of Kuwait & the Middle East’ was created in 1971 to take over the local operations of ‘The British Bank of the Middle East’ (set up in 1941 as the first bank in Kuwait), following the expiry of the latter’s concession. At the time, the State of Kuwait, through the Kuwait Investment Authority, took control of the Bank. In 2002, the state divested a 49.8% shareholding in the Bank and AUB, which already had a 15% stake in the Bank, emerged as the largest shareholder (48%). AUB achieved majority control (74.79%)in August 2005. AUBK’s second largest shareholder (>5%) is the Public Institute for Social Security with 12.19%. The AUBK Shari’a compliant business model includes commercial and investment banking, as well as retail banking, treasury services, and wealth management. As at end-September 2015, total assets rose to KWD3.85 billion (USD12.7 billion) and total capital reached KWD365mn (USD1.2 billion), including non-controlling interest.