Moody’s Investors Service has assigned Baa2/Prime-2 long-term and short-term foreign currency deposit ratings and a D bank financial strength rating (BFSR) to the Kuwait-based Boubyan Bank, while all ratings carry a ‘stable’ outlook.
According to Moody’s, Boubyan’s D BFSR rating derives from its good financial fundamentals, underscored by its high levels of equity capital, solid asset quality, healthy liquidity and strong recurring earning power, which is underpinned by healthy profit margins. A relatively new bank, Boubyan only began its operations in December 2004, having been granted one of two new Islamic bank licences issued in
However, Moody’s explains that the BFSR also takes into account the bank’s short track record of operation, as well as its very limited franchise and scale in the Kuwaiti banking sector, in which Boubyan represents approximately 2.1% of the system’s assets.
Moreover, the bank remains highly dependent on corporate and wholesale banking.
With a growing number of Islamic banks, Islamic financial institutions and international banks operating in Kuwait, all banks — in particular banks like Boubyan which lack sufficient scale — will find it challenging to build their banking franchises as the market becomes increasingly competitive.
The BFSR also reflects the Kuwaiti operating environment risk which, despite improvement, remains highly dependent on oil and oil derivative products — a situation that has been of great benefit to Kuwaiti banks over the past few years, but also potentially exposes them to any downturn in global energy prices.
Moody’s rating also recognises that Boubyan’s funding profile appears less robust than that of other Kuwaiti banks, with a relatively high level of bank funding. This is partly due to the bank’s limited branch network — it currently has only seven branches — which results in a weaker retail-deposit-gathering capacity than that of other Kuwaiti
banks.
However, Boubyan is expected to open eight additional branches in the near term, which are expected to lead to a gradual increase in the bank’s customer deposit base, bringing its funding profile more into line with that of its Kuwaiti peer banks.
Furthermore, Moody’s notes that Boubyan holds a very high proportion of liquid assets — generally cash and short-term commodity “murabaha” with local and international banks — on its balance sheet for liquidity management.
The rating also positively reflects Boubyan’s solid current asset quality, with no non-performing exposures yet recorded. However, Moody’s expects a growth in the bank’s receivables portfolio to lead to a rise in the level of non-performing exposures.
Finally, the BFSR also reflects the bank’s asset and liability single-name concentrations, resulting in a significant asset exposure to, and funding reliance on, a relatively small number of names.
Moody’s assessment of a very high probability of support stems from the Kuwaiti authorities’ long track record of supporting banks facing difficulties, regardless of size, in addition to the Kuwaiti government’s ownership of 24% of the bank via a 20% stake held by the Kuwait Investment Authority as well as the 4% stake held by the Public Institution For Social Security.
Boubyan receives a three-notch uplift from its Baseline Credit Assessment, bringing the GLC to Baa2. The Baa2 long-term foreign currency deposit rating is not constrained by the ceiling for such deposits in
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