Fitch Ratings has affirmed Ahli United Bank B.S.C's (AUB) Long-Term Issuer Default Rating (IDR) at 'BB+' with Stable Outlook.

Fitch has also affirmed AUB's Viability Rating (VR) at 'bb'.

Fitch has withdrawn AUB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with our updated criteria, we have assigned AUB a Government Support Rating (GSR) of 'bb+'.

Key Rating Drivers

AUB's Long-Term IDR reflects a moderate probability of support, if required, from the Kuwaiti authorities, despite the bank being headquartered in Bahrain; it is above the Bahraini sovereign rating (B+/Stable), but capped by Bahrain's Country Ceiling of 'BB+'.

The VR reflects AUB's adequate regional franchise, strong geographical diversification, sound earnings, moderate risk appetite resilient asset quality, adequate capitalisation and comfortable liquidity. AUB's VR is not capped by Bahrain's sovereign rating because of the bank's strong geographical diversification, but it is constrained at two notches above it. This is because AUB will still be affected, albeit to a low degree, by a sovereign default. This also reflects the material exposure of its business model to the weak Bahraini operating environment.

The 'bb' VR is below the 'bb+' implied rating due to negative influence from its business profile.

Bahrain's Country Ceiling Caps Support: In Fitch's view, the Kuwait authorities would have a high propensity to provide support to AUB. The Public Institution for Social Security (PIFSS), an arm of the Kuwaiti state (AA-/Stable), holds an 18.9% stake in AUB. AUB has strong links with PIFSS and substantial exposure to Kuwait (33.4% of credit risk exposures at end-2021) through its subsidiary AUB (Kuwait). Fitch deems potential support for AUB would be immaterial relative to Kuwait's resources.

Fitch is not aware of any legal restrictions on support being provided by the Kuwaiti authorities to AUB. Nevertheless, the likelihood of support for AUB from the Kuwaiti authorities is constrained by Bahrain's Country Ceiling of 'BB+'. The Stable Outlook on AUB's Long-Term IDR therefore reflects that on Bahrain's sovereign rating.

Adequate Franchise; Material Bahraini Exposure: AUB has an adequate regional franchise with solid operations in Bahrain and Kuwait. It is one of the largest domestic banks in Bahrain and this material exposure to the weak Bahraini operating environment ('b+') puts pressure on its business model. AUB is seeing interest from Kuwait Finance House (K.S.C.P.), Kuwait's largest Islamic lender, as an acquisition target and the transaction could potentially be completed in 2H22.

Strong Geographical Diversification: AUB operates across the Gulf Cooperation Council (GCC) region (particularly in Kuwait) and in the UK, but also in higher-risk Middle East and north Africa markets (notably Egypt). Onshore operations in Bahrain constitute 17% of AUB's gross credit exposures.

Moderate Risk Appetite: We view AUB's risk appetite as moderate with prudent underwriting standards and adequate risk controls, as evident in its resilient asset quality.

Resilient Asset Quality: Asset quality has remained sound through several economic cycles and weakened less than at many regional peers in the pandemic. Its problem (Stage 2+3) loans ratio recovered to its pre-pandemic level of 15% at end-1Q22 (end-2020: 17.5%).

Sound Profitability: Profitability also proved sound through economic cycles, reflecting a diversified business model. The impact of the pandemic on AUB's profitability was less marked than on its direct peers. In particular, loan impairment charges (LICs) at AUB were contained and the erosion of the bank's net interest margin (NIM) was limited.

Adequate Capitalisation: AUB's capital ratios are adequate, although lower than regional peers', and buffers above minimum regulatory requirements are comfortable. Fitch expects AUB to maintain adequate capital ratios on prudent growth and healthy internal capital generation.

Comfortable Liquidity: Loans account for about half of total assets and over half of them mature within one year. AUB's deposit concentration is significant but deposits have proven stable.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

AUB's IDRs would be downgraded if Fitch views the willingness or ability of the Kuwaiti authorities to provide support to the bank as having reduced, or if Bahrain's Country Ceiling is revised down.

A downgrade of the Bahraini sovereign rating would result in a downgrade of AUB's VR. A downgrade of the VR could also arise from material deterioration of the bank's operating environments. A substantial deterioration in the bank's asset quality, materialised by a non-performing loans ratio rising to 5% or above, combined with an operating profit/ risk-weighted assets ratio being sustainably below 1.25%, could lead to a VR downgrade.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of AUB's IDRs would require an upward revision of Bahrain's Country Ceiling. A VR upgrade would require an upgrade of the Bahraini sovereign rating and operating-environment score.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

AUB's senior unsecured debt ratings are aligned with the bank's IDRs because Fitch views the likelihood of default on any senior unsecured obligation as the same as that of the bank.

AUB Sukuk Limited (AUBSL) is a special purpose vehicle incorporated in the Cayman Islands and was established solely to issue certificates (sukuk). The certificates' long-term rating is in line with AUB's 'BB+' Long-Term IDR, which reflects Fitch's view that default of these senior unsecured obligations would equal a default of AUB in accordance with Fitch's rating definitions.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The senior unsecured debt and sukuk ratings are sensitive to a change in AUB's IDRs.

VR ADJUSTMENTS

The operating-environment score of 'bb+' is below the 'bbb' category implied score due to the following adjustment reason: sovereign rating (negative) and international operations (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 information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

AUB's Long-Term IDR is linked to the Kuwaiti sovereign's.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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