The Banking Executive Magazine - March 2022 Issue

Tiktok for Banking and Finance Good Domestic Franchise: GB is the fourth-largest bank in Kuwait, with a market share of 9.1% by local assets at end-1H21. The bank's good branch network and strong brand un- derpin its franchise. GB's competent and highly experienced management supports its good record of strategy implementation. GB's strategy is consistent, based on domestic or- ganic growth, fast growth in retail, selective corporate lending and digi- tal transformation. High Concentrations: Concentrations by economic sector and single obligor is the main risk to GB's asset quality and capital, similar to peers. However, GB's good risk manage- ment and cautious approach to risk- taking mitigate its risk profile. Resilient Asset Quality: GB's Stage 3 loans ratio is stable (1% at end- 2021), lower than that of peers and supported by write-offs. The Stage 2 loans ratio (6.6% at end-2021) com- pares well with peers. The potential problem loans generation ratio is low. GB's reserve coverage of Stage 3 loans (586% at end-2021) and gross loans (5.8%) is higher than that of peers. Recovering Profitability: GB's net profit improved by 46% in 2021 owing to lower funding costs and im- pairment charges, but remained below pre-pandemic levels. Fitch ex- pects GB's profitability to improve in 2022 in the context of expected growth, higher interest rates and sta- ble impairment charges. Adequate Capitalisation: GB's com- mon equity Tier 1 (CET1) ratio (14.5% at end-2021) is adequate and Fitch expects it to remain stable in 2022. High excess loan loss al- lowances of Stage 3 equivalent to 33.3% of CET1 capital at end-2021 largely mitigate high loan book con- centrations. The repayment of KWD100 million subordinated Tier 2 bonds, only half of which were re- financed in 2021, was behind the re- duction of GB's total capital adequacy ratio by around 160bp to 16.7% at end-2021. Stable Funding: Customer deposits provide the bulk of GB's funding (86% at end-2021). These deposits are stable, which mitigates the risks arising from high concentration and maturity mismatches. GB's gross loans-to-deposits ratio is high (97% at end-2021; above peers), but closely managed by the bank. Net liquid assets accounted for a modest 6% of total assets at end-2021 and covered only 8% of customer de- posits, which was lower than at peers. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: A downgrade of GB's Long-Term IDR would require a downward revision of the bank's Government Support Rating (GSR). The latter would likely stem from weaker ability to support, reflected in a Kuwaiti sovereign downgrade, which is not our base case considering the Stable Outlook on the sovereign rating. Weaker propensity from the Kuwaiti authorities to support GB would also lead to negative rating action, but this is unlikely in Fitch's view, given the strong record of supporting do- mestic banks. A deterioration in asset quality, re- flected in higher Stage 3 and Stage 2 loans and write-offs, could lead to a downgrade of the VR, especially if impairment charges pressure the bank's profitability to the extent it af- fects capitalisation. A sustained deterioration in the do- mestic operating environment or in- creased concentrations to higher risk economic sectors and single obligors could also negatively affect the VR, especially if this impacts asset quality and capitalisation. Factors that could, individually or collectively, lead to positive rating action/upgrade: An upgrade of GB's Long-Term IDR could come from an upward revision of its GSR. The latter would likely stem from a stronger ability to sup- port, reflected in a Kuwaiti sovereign upgrade. However, this is unlikely in the near term, given the already high level of the GSR and the recent downgrade of the sovereign. A further upgrade of the VR is un- likely as it would require a material improvement in the business profile, including market position and more diversified business model, including lower concentrations by economic sectors and single obligors. The latter will be challenging considering the undiversified and developing nature of the Kuwaiti economy, which offers limited opportunities for further di- versification. VR ADJUSTMENTS The Business Profile score of 'bbb-' has been assigned above the 'bb' cat- egory implied score due to the fol- lowing adjustment reason: Market Position (positive). BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more in- formation about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchrat- ings.com/site/re/10111579 ISSUE 159 MARCH 2022 the BANKING EXECUTIVE 37