Burgan Bank’s Ratings Affirmed With ‘Stable’ Outlook
Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Burgan Bank (BB)’s Long-Term Foreign Currency Rating of ‘A-‘ and Short-Term Foreign Currency Rating of ‘A2’.
The Bank’s Support level is affirmed at ‘2’, underpinned by its systemic importance and the very high likelihood of support from the authorities in case of need.
The Financial Strength Rating (FSR) is affirmed at ‘BBB’, supported by ongoing high liquidity, the rebound in net profit and solid capital adequacy.
The FSR continues to be constrained by the Bank’s comparatively high non-performing loan (NPL) ratio and below sector average loan-loss reserve coverage, notwithstanding the modest improvement in the first nine months of the current year. The Outlooks for all the Ratings are affirmed at ‘Stable’.
BB, Kuwait’s currently second largest conventional commercial bank by consolidated assets, is majority owned by Kuwait Projects Company Holding (KSC) (“KIPCO”). KIPCO, one of the major diversified holding companies in the MENA region, is well established and has held an effective controlling interest in the Bank since 1997. Having acquired four MENA regional banks from KIPCO group sister company United Gulf Bank and successfully integrating them, BB’s risk profile has significantly changed in recent years.
While it has become one of the most regionally diversified Kuwaiti commercial banks with a clear focus on the MENA region, the takeover of the regional bank subsidiaries raised the Bank’s indirect risk exposure to low rated sovereigns (namely Jordan, Algeria, Iraq and Tunisia) from an earlier negligible level.
Following a sharp increase in NPLs in 2011, mainly due to large impaired exposures in Kuwait and Jordan, the Bank’s NPLs declined moderately at end Q3 2012. While this recent trend is a positive development, BB’s ratio of NPLs to gross loans remained high and above the sector average and its loan-loss reserve coverage weaker. With respect to the latter management have started to build up provisions and as a result loan-loss reserve cover reached an adequate level at the end of third quarter 2012.
Liquidity as measured by key indicators remains strong and among the best in the Kuwaiti market, reflecting BB’s lower share of loans in total assets combined with a larger stock of liquid assets. CI notes that a significant proportion of this liquidity is at subsidiary banks. Funding is sourced predominantly from customer deposits and these continue to grow at a healthy pace. In common with most (but not all) Kuwait banks, BB’s balance sheet continues to be solidly capitalized, following a well received rights issue and a subordinated term issue in 2010.
Profitability at both the operating and net levels improved further in Q1-Q3 2012 aided by higher net interest and non-interest income coupled with effective cost control. While the increased contribution of the Bank’s ‘international’ operation to gross income testifies to the bank subsidiaries’ sound performance, it also underscores the setback in profitability at the Kuwait operation in prior years. Nonetheless, gross income generation remains strong reflecting multiple sources of income, while operating profitability provides the flexibility to step up provisioning as necessary.
BB commenced operations in 1977 as a government-owned bank. In 1997, the Bank was privatized with KIPCO obtaining control. During 2007, KIPCO increased its ownership in BB to 43.01% from 33.87%, cementing BB’s status as a core member of the KIPCO Group. The second largest shareholder is United Gulf Bank (17.86%) in Bahrain. Through its domestic network of 23 branches, which is supplemented by 98 ATMs, the Bank provides corporate/commercial banking as well as retail and private banking. As at end-September 2012, total assets rose to KD5.17bn ($17.9bn) and total capital reached KD707m ($2.45bn).
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