Capital Intelligence (CI) affirmed Ahli United Bank Kuwait (AUBK)’s Financial Strength Rating (FSR) of ‘A-‘, in view of its very sound and better than sector average loan asset quality, strong capital adequacy, good liquidity and steadily improving profit – at both operating and net levels. The management support accruing from Bahrain- based Ahli United Bank (AUB) ownership is also a supporting factor. The FSR is constrained by customer deposit and financing concentrations (although this is to an extent systemic), the lower than peer average non-financing income level and narrowing profit margin, and the challenging operating environment. The ‘Stable’ Outlook for the FSR is maintained.
The bank’s Support Level is raised to ‘1’ from ‘2’ 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 deemed by CI extremely strong. On this basis, AUBK’s Long- Term Foreign Currency (FC) Rating is raised to ‘A+’ from ‘A’, while the Short-Term FC Rating of ‘A2’ is maintained. The Outlook on the FC Ratings is affirmed at ‘Stable’.
AUBK is the largest member AUB group and a beneficiary of managerial and product support mechanisms available from its Bahraini parent. 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 Islamic financing facilities (NPIFFs), which remains below the Kuwaiti sector average. Moreover, financing-loss reserves provided more than full coverage for NPIFFs, underscoring a conservative provisioning policy. However, there is significant borrower concentration risk as well as a moderately high degree of sector concentration risk, given that about one-half of borrowers operate in the real estate and construction sectors, a phenomenon seen across other (but not all) Kuwaiti banks. That said, it should be noted that being an Islamic bank a significant proportion of AUBK’s financings are backed by assets, typically real estate.
Aided by healthy growth in gross income in 2013 and into the first nine months of 2014, thanks to higher financing and non-financing income combined with good cost control, AUBK’s operating and net profit have continued to grow. ROAA rose further to a good level in Q1-Q3 2014 (annualised basis) despite higher provisioning, with returns remaining better than the Kuwait sector average. Keen and increasing competition in Islamic banking, however, has pushed up AUBK’s cost of funds in recent periods and this in turn has resulted in some margin compression.
The bank continues to enjoy good liquidity ratios, notwithstanding some moderate tightening of ratios. The sound liquidity position is supported by an expanding base of customer deposit funding. Historically, AUBK’s customer deposit base has always been concentrated, as is the case with other Kuwaiti banks, given it tends to receive large amounts of deposit funding from the oil sector and government or semi- governmental entities. However, these deposits are inherently stable as the Kuwait government remains the largest depositor in the banking system. The balance sheet remained well capitalised with a capital adequacy ratio (CAR) currently on par with the average for the local market.
Bank Of Kuwait
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 (KIA), took control of the bank. In 2002, the state divested a 49.8 per cent shareholding in the bank and AUB, which already had a 15 per cent stake in the bank, emerged as the largest shareholder (48 per cent). AUB achieved majority control (74.79 per cent)in August 2005. AUBK’s second largest shareholder (>5 per cent) is the Public Institute for Social Security with 12.19 per cent. The AUBK Shari’ah compliant business model includes commercial and investment banking, as well as retail banking, treasury services, and wealth management. As at end-September 2014, total assets rose to KWD 3.62 billion ($12.5 billion) and total capital reached KWD 334 million ($1.15 billion) including non-controlling interest.
Originally published on www.cpifinancial.net