Fitch affirms Gulf Bank at 'A+'
Fitch Ratings has affirmed Gulf Bank K.S.C.P.'s (GB) Long-Term Issuer Default Rating (IDR) at 'A+' with a Negative Outlook. Fitch has also affirmed the bank's Viability Rating (VR) at 'bb+'. A full list of rating actions is below.
GB's IDRs are driven by support from the Kuwaiti sovereign. Its Support Rating (SR) of '1' and Support Rating Floor (SRF) of 'A+' reflect Fitch's view of an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks. GB's SRF is in line with Fitch's domestic-systemically important bank SRF for Kuwait.
Fitch's expectation of support from the authorities is underpinned by Kuwait's strong ability to provide support to domestic banks, as reflected by the sovereign rating (AA/Negative) and a strong willingness to do so irrespective of the bank's size, franchise, funding structure and level of government ownership. This view is reinforced by the authorities' record of support for the domestic banking system.
The Central Bank of Kuwait (CBK) operates a strict regime with active monitoring to ensure the viability of banks, and has acted swiftly in the past to provide support where needed. Contagion risk among domestic banks is high (Kuwait is a small and interconnected market) and we believe this is an added incentive to provide state support to any Kuwaiti bank.
The Negative Outlook on GB's Long-Term IDR reflects that on the Kuwaiti sovereign rating.
GB's 'F1' Short-Term IDR (the lower of two options mapping to a 'A+' Long-Term IDR) reflects "wrong-way" risk. A significant proportion of Kuwaiti banks' funding is related to the government and they would likely need support at a time when the sovereign itself is experiencing some form of stress.
The VR reflects GB's improving but only adequate capitalisation considering its concentrated loan book, pressured asset quality and below-peeraverage profitability owing to high impairment charges. The VR also considers the bank's good domestic franchise, experienced management, consistent strategy and execution, cautious risk approach, good liquidity, stable funding as well as the pressures on the domestic operating environment due to the ongoing pandemic.
The decline in oil prices has had adverse effects on Kuwait's public finances and debt dynamics, external balances and economic growth and are adding to the pressure on the banks from the coronavirus fallout. GB is exposed to slower domestic economic growth and potentially lower lending opportunities. However, Kuwait is more resilient than its Gulf Cooperation Council peers, mainly due to its exceptionally strong external balance sheet and vast net foreign assets, estimated at 652% of GDP at end-2020. This supports the government's spending, albeit at a slower pace, and banks' financial profiles.
GB has a good franchise in Kuwait, supported by its large branch network and strong brand. The bank has a competent management team, which is highly experienced in local and regional banking, with a good record of strategy implementation. The bank's strategy is consistent, based on cautious domestic organic growth in retail and corporate lending, complemented by digital transformation.
GB's impaired loans ratio was stable (1.2% at end-2020; below the peer weighted average (PWA): 1.9%), supported by write-offs. The generation of potential problem loans ratio (net change in impaired and restructured but performing loans plus write-offs) was only 0.8% in 2020 and 0.9% in 2019 (PWA: 1.9% in 2020 and 1.4% in 2019).