Moody’s affirms ratings of Kuwait Finance House K.S.C.P. & Ahli United Bank K.S.C.P.

LIMASSOL, Aug 2: Moody’s Investors Service (“Moody’s”) has today affirmed the A2 / Prime-1 long and short-term domestic and foreign currency deposit ratings of Kuwait Finance House K.S.C.P. (KFH) and Ahli United Bank K.S.C.P (AUBK) -- which is majority owned by Ahli United Bank B.S.C. (AUB, unrated). The rating agency has also affirmed KFH’s and AUBK’s Baseline Credit Assessments (BCA) and Adjusted BCAs at baa3. The outlook on the long-term ratings of both banks remains stable.

Today’s rating action on KFH and AUBK follows KFH shareholders’ approval of the acquisition of Ahli United Bank B.S.C. [1] -- the largest bank based in Bahrain - on 25 July 2022. Upon completion of the acquisition, KFH will become the legal owner of all AUB shares.

A full list of affected ratings is included at the end of the press release.

Ratings Rationale Kuwait Finance House K.S.C.P. Affirmation

This transaction will position KFH as a dominant bank in the Gulf Co-operation Council (GCC) as the addition of AUB’s solid corporate banking franchise complements its large and strong domestic retail customer base. Moody’s believes that synergies from this larger franchise, after allowing for integration costs, has potential to drive stronger profitability.

The acquisition will enhance KFH’s geographic diversification, although the impact on the (moderate) macro profile Moody’s assigns to the bank is limited given the positive impact from the reduction in Turkish concentration is largely mitigated by higher concentration in other countries including Bahrain and Egypt. The bank’s non-Kuwaiti financing receivables on combined bases will increase to 40% from 35% of total financing receivables on a standalone basis.

According to Moody’s the merger gives rise to considerable execution and integration risks. Recent evidence from other mergers and acquisitions in the GCC suggests difficulty in forecasting financial performance, delays in integration and strategy execution and lower customer satisfaction translating into a loss of existing market share during the integration.

Taking into account these considerations Moody’s nevertheless expects the initial credit profile of the combined entity to be broadly similar to the pre-acquisition positioning.

KFH’s stage 3 financings at 2.8% as of March 2022, is expected to remain broadly stable around the same level post-acquisition.

Following the acquisition, the combined entity is expected to have solid capital buffers. The TCE ratio of the combined entity will be around 13.2%, slightly higher than KFH’s standalone ratio as of March 2022.

The affirmation also takes into consideration Moody’s expectation that KFH’s solid funding and liquidity will be maintained post-acquisition. The higher market funding of the combined entity (19% of tangible banking assets) is largely mitigated by the sizeable liquidity buffers and relatively low net loan to deposit ratio of 80% as of March 2022.

Moody’s affirmation of KFH’s A2 long-term deposit ratings is based on Moody’s continued assumption of a very high probability of government support, which translates into four notches of uplift from the bank’s baa3 BCA. Stable Outlook

The stable outlook on KFH’s long-term ratings, balances the enhanced geographic diversification and lower exposure to complex investments which historically has been high for KFH with the execution and integration risks of the acquisition in the short-term.

Ahli United Bank K.S.C.P Affirmation

The affirmation of AUBK’s BCA reflects Moody’s view that immediately upon completion of the transaction the bank’s operations and standalone financial profile are not expected to change significantly. The bank’s baa3 BCA will continue to capture: (1) solid profitability, driven by its corporate banking franchise; combined with (2) sound capital adequacy and solid liquidity buffers; although moderated by (3) significant credit and funding concentrations.

Moody’s affirmation of AUBK’s A2 long-term deposit ratings is also based on continued very high government support assumptions for the bank upon transaction completion, which translates into four notches of uplift from the bank’s baa3 BCA.

Stable Outlook

The stable outlook assigned to AUBK’s long-term deposit ratings continues to reflect that capital, profitability and liquidity are expected to remain solid, although the bank’s asset quality and funding remain subject to concentration risks.

As per KFH’s disclosure, upon the completion of a legal merger between KFH and AUB, AUBK (majority owned by AUB currently) is to be fully-acquired by KFH, and is expected to be converted into a digital bank thereafter. Notwithstanding the rating affirmation, Moody’s notes that it will continue to monitor developments regarding the deal and the ultimate effects on AUBK’s consolidated asset quality, capitalisation and earnings.

Factors that could lead to an upgrade or downgrade of the ratings

Upward pressure on KFH’s ratings could develop from any combination of the following: (1) successful integration of the acquisition across various geographies without significant customer attrition or financial implication and (2) increase in profitability driven by stronger market positioning along with realisation of synergies and no unexpected increase in one-time integration costs.

Upward pressure on AUBK’s ratings could develop from a material reduction in its credit and funding concentrations and/or potential future parental support rating uplift coming from KFH upon completion of the transaction.

Downward pressure on KFH’s ratings could develop if there were: (1) integration challenges negatively impacting profitability; or (2) unexpected changes in its asset risk profile as a result of significantly higher borrower or sector concentrations following the acquisition.

Downward pressure on AUBK’s ratings could develop from a deterioration in its asset quality as well as capitalisation and/or a material weakening in its liquidity. Also, upon completion of the transaction, should there be any significant downsizing of the bank’s balance sheet through the expected conversion into a digital bank, this could exert downward pressure on the bank’s ratings.

List of affected ratings

Issuer: Ahli United Bank K.S.C.P Affirmations:

Long-term Counterparty Risk Ratings, affirmed A1 Short-term Counterparty Risk Ratings, affirmed P-1 Long-term Bank Deposits, affirmed A2, outlook remains Stable Short-term Bank Deposits, affirmed P-1 Long-term Counterparty Risk Assessment, affirmed A1(cr)

Short-term Counterparty Risk Assessment, affirmed P1(cr)

Baseline Credit Assessment, affirmed baa3 Adjusted Baseline Credit Assessment, affirmed baa3 Outlook Action:

Outlook remains Stable

Issuer: Kuwait Finance House K.S.C.P. Affirmations:

Long-term Counterparty Risk Ratings, affirmed A1 Short-term Counterparty Risk Ratings, affirmed P-1 Long-term Bank Deposits, affirmed A2, outlook remains Stable

Short-term Bank Deposits, affirmed P-1 Long-term Counterparty Risk Assessment, affirmed A1(cr)

Short-term Counterparty Risk Assessment, affirmed P1(cr)

Baseline Credit Assessment, affirmed baa3 Adjusted Baseline Credit Assessment, affirmed baa3 Outlook Action:

Outlook remains Stable