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Capital Intelligence affirms Burgan Bank’s KWD100mn

Subordinated Bond Rating at ‘BBB+’

Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed the Rating for Burgan Bank’s (BB) KWD100mn Subordinated Bond issued in December 2012 at ‘BBB+’, on ‘Stable’ Outlook.

This rating is set one notch below the Bank’s Long-Term Foreign Currency Rating of ‘A-’ to reflect that the Bond is a Basel II compliant subordinated instrument.

The Rating is supported by BB’s improved asset quality in recent years coupled with strengthened cover for non-performing loans (NPLs), the comfortable liquidity and the large capital injections in 2014.

The Bank’s geographically diversified asset base and revenue streams are also a supporting factor to some degree.

The Rating is constrained by BB’s high indirect exposure to non-investment grade sovereigns through subsidiary banks, considerable exposure to related parties, and by customer concentrations in deposits and to a lesser extent in loans (although this is to an extent systemic). Also constraining the Rating is the still modest net profitability despite the recent rebound, and the ongoing difficult regional operating environment.

BB, currently Kuwait’s second largest conventional commercial bank by consolidated assets, is majority owned by Kuwait Projects Company Holding (KSC) . KIPCO, one of the largest holding companies in the MENA region, has held an effective controlling interest in the Bank for nearly two decades.

BB’s risk asset profile was significantly modified over the recent past after it acquired (and integrated) four MENA regional banks from KIPCO group sister company United Gulf Bank (UGB). While BB 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 raised its risk exposure to lower rated sovereigns (namely Jordan, Algeria, Iraq, Tunisia and, more recently, Turkey) from an earlier negligible level. The economy and operating environment in these countries remains challenging, while the underlying credit and political risks have increased.

Although NPLs rose moderately in recent periods, following previous successive declines, the NPL to gross loans ratio remained at a very satisfactory level, while increased loan-loss reserves continued to provide more than full cover. This, together with a strong capital base, means that the Effective Coverage Ratio is also strong.

Liquidity, as measured by key indicators, remains good and among the best in the Kuwaiti market, reflecting BB’s slightly lower share of loans in total assets, combined with its larger stock of liquid assets. CI, however, notes that a significant proportion of this liquidity is at the subsidiary banks’ level. The Bank’s funding is sourced predominantly from customer deposits and these continue to grow at a healthy pace. BB allowed some relatively expensive customer deposits to run off in response to the successful capital increases in 2014.

On a positive note, concentrations in the customer deposit base have reduced, placing the Bank in good stead given the prospect of tightening liquidity conditions in the Kuwaiti market in the near to medium-term, and the associated increase in funding risk. As a result of a decline in government revenue following the sharp fall in oil prices, some government entities have drawn down on their deposits in recent months. The Kuwaiti banks as a group also face the threat to funding of competition from newly issued government debt.

BB’s balance sheet is comfortably capitalised, following a Perpetual Tier 1 issue, as well as the successful rights issue in 2014. This has helped maintain the capital adequacy ratio (CAR) at a satisfactory level, although the CAR declined as a result of Basel III implementation. Nonetheless, the Bank’s leverage, as measured by the ratio of total capital to total assets, improved noticeably following the capital injection and remained sound at the current mid-year. The CAR is expected to increase to a more comfortable level in the near term. Internal capital generation recovered in 2014 as a result of a rebound in net profitability and a significantly reduced dividend payout. However, while operating profitability has remained satisfactory, the return on average assets (ROAA) remains modest in part due to ongoing provision charges including a significant level of general provisions. Gross income generation remains good nevertheless, reflecting multiple sources of revenue, while operating profitability at the current level provides the flexibility to step up provisioning if necessary.

The Bank commenced operations in 1977 as a government-owned bank. In 1997, BB was privatised with KIPCO obtaining control. During 2007, KIPCO increased its ownership in BB to 43.01%, cementing BB’s status as the largest and core member of the KIPCO Group. The second largest shareholder is UGB (17.86%) in Bahrain. Through its domestic network of 27 branches, which is supplemented by 121 ATMs, the Bank provides corporate/commercial banking, as well as retail and private banking. As at end-June 2015, total assets rose to KWD7.98 billion (USD26.4 billion) and total capital reached KWD947mn (USD3.13 billion).