OREANDA-NEWS.  Fitch Ratings says in a new report that prospects are brighter for the eight commercial banks it rates in Kuwait on the back of continuing strong public spending.

The rated commercial banks - National Bank of Kuwait (NBK), Kuwait Finance House (KFH), Gulf Bank (GB), Commercial Bank of Kuwait (CBK), Al Ahli Bank of Kuwait (ABK), Ahli United Bank (Kuwait) (AUBK), Kuwait International Bank (KIB) and Boubyan Bank (Boubyan) - are expanding lending under favourable operating conditions as the Kuwaiti government taps its exceptionally strong fiscal and external position to maintain high levels of public spending.

The stable and supportive operating environment has a moderate influence on the banks' Viability Ratings (VRs). Under favourable conditions, bank credit grew at the fastest rate in the last five years in 2014 (up 11.5% for the sector and 10% for the Fitch-rated banks) due to strong demand in the consumer and real estate sectors. Corporate loan growth was also attributed to banks participating in several large transactions following a strong pick-up in Kuwait's infrastructure spending. As a result, profitability is recovering on higher revenues as well as lower loan impairment charges with improving assets quality and very high reserve coverage as required by the Central Bank.

We also expect stronger margins due to more opportunities domestically and the banks' diversification strategies, mainly targeting growth in the retail and SME sectors and regional expansion. Fitch believes that the banks' prospects are brighter compared with the past when they had typically lagged regional peers in performance.

The Kuwaiti banking sector is well-capitalised. The Fitch-rated banks have robust capital buffers with Fitch Core Capital (FCC) ratios in excess of 15% given high concentration risk in the sector. Banks moved to Basel III in January 2014 with relative ease but face meeting additional buffers as they are phased in. Internal capital generation continues to be modest. Measures to strengthen capital could include issuing additional Basel III-compliant Tier 1 and Tier 2 subordinated debt securities.

Banks are primarily funded by large volumes of short-term customer deposits. A key strength is that the government places substantial low cost and behaviourally stable deposits with all banks. Therefore, Kuwaiti banks have little reliance on market funding and contractual asset/liability maturity mismatches are not seen as a material risk.

The Kuwaiti banks' Long- and Short-term Issuer Default Ratings (IDRs), Support Ratings (SR) and Support Rating Floors (SRF) reflect Fitch's view that there is an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed. This is reflected in the SR of '1' and the SRF of 'A+' for all rated banks (apart from NBK) irrespective of their size, franchise, funding structure and the level of government ownership. NBK is assigned a SRF one notch higher at 'AA-' given its unique status as the flagship bank in Kuwait, its historical role in the domestic banking sector and close business and strategic links with the state.

Fitch's view of sovereign support is based on Kuwait's financial strength as indicated by its rating (AA/Stable), in addition to the authorities' extremely strong propensity, in the agency's view, to support the domestic banking system, as has been demonstrated over the years.

The Stable Outlooks on the banks' IDRs reflect the Outlook on the Kuwaiti sovereign rating.

The accompanying special report "Peer Review: Kuwaiti Banks- Prospects Brighter on Pick-up in Infrastructure Spending" is available at www.fitchratings.com or by clicking the link in this comment.