Fitch has affirmed Ahli United Bank’s (AUB) long-term issuer default rating (IDR) at BBB+, Ahli United Bank Kuwait’s (AUBK) at A- and Ahli United Bank UK’s (AUBUK) at BBB+. The outlook on the long-term IDRs is stable.
AUB’s IDRs and Support Rating reflect the high probability of support from its core shareholder with an 18.5% stake in the bank, the Public Institution for Social Security (PIfSS), an arm of the State of Kuwait (‘AA’/Stable). The very strong links between PIfSS and AUB date back to before the creation of AUB and include, inter alia, PIfSS’s strong interest as a shareholder in both AUB and AUBK (12.2% stake). Nevertheless, support from PIfSS is constrained by Bahrain’s Country Ceiling (‘BBB+’) and the Stable Outlook reflects the Outlook on the Bahraini sovereign ratings.
AUBK’s IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support from the Kuwaiti authorities, if required. Kuwait has a long history of sovereign support for the entire banking system, and Fitch believes AUBK would be no exception if needed, commensurate with its position in the banking system (6% of banking sector assets at end-H113). In addition, the Kuwaiti state owns a 14.2% stake in the bank through PIfSS and the Kuwait Investment Authority.
AUBUK’s IDRs and Support Rating reflect the high probability of support from its parent, AUB, and ultimately from its parent’s core shareholder, PIfSS. AUBUK is wholly-owned by AUB and is considered a core subsidiary. As such, its IDRs are in line with those of its parent and subject to the same constraint. The Stable Outlook reflects the Outlook on AUB’s Long-term IDR.
AUB’s IDRs and Support Rating are sensitive to any change in Fitch’s view of PIfSS’s ability or propensity to provide support or to any change in Bahrain’s Country Ceiling. An upward revision of Bahrain’s Country Ceiling would lead to an upgrade of AUB’s Long-term IDR by one notch. The IDRs would be downgraded if there were a downward revision of Bahrain’s Country Ceiling or if Fitch believed that PIfSS’s ability or willingness to support were lower.
AUBK’s IDRs, Support Rating and Support Rating Floor are sensitive to any change in Fitch’s view of the willingness or ability of the Kuwaiti authorities to provide support.
AUBUK’s IDRs and Support Rating are sensitive to any change in Fitch’s view of the ability or willingness of AUB to support its subsidiary. The ratings could also be sensitive to any change in AUBUK’s ownership or importance to the group, which Fitch considers unlikely.
The downgrade of AUB’s VR to ‘bbb’ from ‘bbb-‘ reflects heightened risk in Egypt, where the bank has a subsidiary with sizeable assets relative to AUB’s consolidated core capital. Egypt’s sovereign rating of ‘B-‘/Negative indicates Fitch’s view that material default risk is present in the country, although a limited margin of safety remains. If AUB had to take substantial write-downs of loans and/or sovereign debt in its Egyptian subsidiary, it would have a significant impact on the group’s Fitch Core Capital (FCC) ratio. While Fitch understands that AUB has no obligation to support AUB Egypt beyond its current investment, in Fitch’s opinion it would do so given that AUB Egypt is an important long-term investment for AUB, representing a significant part of AUB’s regional strategy.
AUB’s VR reflects the bank’s solid operating profitability, despite the challenging operating environment in some of its markets, and its sound liquidity and funding base. Asset quality metrics are strong with impaired loans representing only 2.6% of gross loans at end-H113 and loan loss reserve coverage at 147%. The loan book is concentrated, but this is mitigated at group level by its geographic and sector diversification and the group’s largely highly rated investment portfolio. Corporate governance is generally a negative rating consideration in the region, although Fitch believes that this has been addressed better by the AUB group than some of the other rated banks in the region.
Customer deposits are concentrated and, to a large extent short-term, but have proved stable. AUB’s capital base is adequate, but its FCC ratio (end-H113: 11.6%) is somewhat below regional norms. However, Fitch believes that the bank would be able to raise capital if needed for expansion or to support any acquisitions.
The group is highly integrated, with common risk management, while benefiting from geographic and sector diversification. Major group subsidiaries and associates are mainly located in the Gulf Cooperation Council (GCC) and UK.