Moody’s affirms Boubyan’s Baa1 long-term deposit ratings

Outlook changed to positive from stable

LIMASSOL, Oct 12: Moody’s Investors Service (Moody’s) has today affirmed Boubyan Bank KSCP (Boubyan)’s Baa1 long-term deposit ratings, its Prime-2 short-term deposit ratings, baa1 adjusted baseline credit assessment (BCA), ba1 BCA and A3(cr)/Prime-2(cr) Counterparty Risk Assessment. At the same time, Moody’s has changed the outlook on the bank’s long-term deposit ratings to positive from stable.

Moody’s affirmation reflects Boubyan’s growing domestic retail and corporate franchise, which supports its solid profitability metrics, strong capital buffers and stable funding profile. These strengths are moderated by the downside risks to the bank’s asset quality, owing to its high credit concentrations combined with a relatively unseasoned financing book, following a rapid growth over the recent years.

The change in outlook to positive from stable reflects Moody’s view that the progressive growth in Boubyan’s domestic market share strengthens its strategic and financial importance to its parent National Bank of Kuwait SAKP (NBK; Aa3 negative, a3) and to the domestic financial system, which increases the likelihood of parental support in case of need.

Boubyan is an Islamic bank established in 2004 in Kuwait and a subsidiary of NBK, which acquired a 47 percent stake in the bank in 2009 before raising it to 58 percent in 2012.

Today’s affirmation of Boubyan’s ba1 BCA reflects the bank’s growing domestic retail and corporate franchise supporting solid profitability metrics and capital buffers, moderated by the downside risks to its asset quality.

The bank’s growing domestic retail and corporate franchise supports its solid profitability metrics, strong capital buffers and stable funding profile. Boubyan exhibits high capital buffers (18.9 percent Tangible Common Equity (TCE) to Risk Weighted Assets), a modest market funding reliance (5.4 percent market funding to tangible banking assets ratio at H1 2016) and high liquid resources (26.3 percent liquid banking assets to tangible banking assets ratio).

These strengths are balanced against downside risks to the bank’s asset quality, owing to high credit concentrations combined with a relatively unseasoned financing book, following a rapid growth over the recent years. Specifically, the bank’s exposure to the volatile construction and real estate sectors represented 218 percent of its TCE and 23 percent of the financial assets at YE 2015 (local average around 30 percent). Moreover, Boubyan’s 9 percent growth in financings during the first six months of 2016 (20 percent compound aggregate growth rate over 2012-15 compared to the 8 percent system average) limits the seasoning of the book and poses challenges for the bank’s operational and underwriting controls. These factors moderate the bank’s low problem financing to gross financings ratio at 0.8 percent as of H1 2016 (3.3 percent local average).

The change in outlook to positive, from stable, reflects Moody’s view that the progressive growth in Boubyan’s domestic market share strengthens its strategic and financial importance to its parent NBK and to the domestic financial system, which increases the likelihood of parental support in case of need.

First, Boubyan’s growing domestic market share in terms of financings (5 percent as of December 2015) increases its strategic importance to its parent by supporting NBK’s own market share (33 percent as of December 2015). This strategic importance is underpinned by the growth potential of Boubyan in a large Islamic banking market that represent 40 percent of total banking assets in Kuwait at June 2016.

Second, the faster growth of Boubyan in comparison to its parent increases its financial importance within NBK, as evidenced by Boubyan’s higher contribution to NBK’s assets (14 percent at H1 2016 from 11 percent in 2012), financings (17 percent at H1 2016 from 13 percent in 2012) and net income (12 percent during H1 2016 from 3 percent in 2012).

Given the systemic importance of Boubyan, our parental support assumptions include the support from Kuwaiti government in case of need.