Fitch Ratings has affirmed Commercial Bank of Kuwait's (CB) Long-term Issuer Default Rating (IDR) at 'A+' and Viability Rating (VR) at 'bb-'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR CB's Long- and Short-term IDRs, Support Rating and Support Rating Floor reflect Fitch's belief that there is an extremely high probability of support being provided by the Kuwaiti authorities, if needed. Fitch's assessment of support is based on the financial strength of Kuwait (AA/Stable), CB's importance within the domestic banking system and the longstanding track record of support by the authorities for the Kuwaiti banking system. RATING SENSITIVITIES - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR CB's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's assumptions around the propensity or ability of the Kuwaiti authorities to provide timely support to CB. However, Fitch notes the strong history of support provided by the Kuwaiti government for the banking system. KEY RATING DRIVERS - VR The VR reflects the high concentrations in CB's loan and funding profiles, and high impairment charges that continue to impact overall levels of profitability, which are the result of a previously high risk appetite. The rating also considers CB's established domestic franchise, improving asset quality indicators following substantial NPL write-offs, and acceptable liquidity and capitalisation. CB's profitability continues to be weak, with nearly all of its pre-impairment operating profit absorbed by high impairment charges in 2012 and Q113. Fitch expects overall profitability will remain under pressure in the short term as the bank restructures its loan portfolio, but will eventually improve as impairment charges normalise. CB's asset quality indicators have significantly improved following large write-offs, with the NPL ratio declining to 2.8% at end-2012 (end-2011: 6.7%), and reserve coverage improving to 169% (end-2011: 92%). CB reported Tier 1 and Fitch core capital ratios of 16.7% and 21.0%, respectively, at end-2012, which Fitch views as acceptable. However, capital is exposed to high borrower and sector concentrations within CB's loan portfolio, as well as a large AFS securities portfolio (most of which is regional equities, in particular its stake in Boubyan Bank). CB benefits from a large and stable deposit base (73% of non-equity funding at end-2012), with significant funding support from quasi-government deposits. The bank's liquidity position is comfortable, with a Fitch calculated loans/customer deposits ratio of 98.9% at end-2012. Liquid assets comprising cash, treasury bonds, interbank placements and investment securities amounted to 40% of total assets at end-2012. RATING SENSITIVITIES - VR Downside pressure on the VR would result from deterioration in the domestic operating environment, or further deterioration in the bank's current loan exposures or investment portfolio, if it had an impact on CB's risk indicators and eroded capital from its current level. Upside potential would require more diversification in the loan portfolio, normalised impairment charges and a return to healthy profitability. CB is the fourth-largest bank in Kuwait by total assets, and provides a wide range of corporate and retail banking products to the local market. At end-Q113, CB's main shareholder was Al Sharq Holding, with a 23% stake. The remaining shares are widely held and are listed on the Kuwait Stock Exchange. The rating actions are as follows: Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+'. Source: Fitch Ratings
