OREANDA-NEWS. Fitch Ratings has affirmed Ahli United Bank (UK) PLC's (AUBUK) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook and Viability Rating (VR) at 'bbb-'. AUBUK's Short-term IDR has been affirmed at 'F2' and its Support Rating at '2'.

KEY RATING DRIVERS
IDRS AND SUPPORT RATING
AUBUK's IDRs and Support Rating reflect Fitch's expectation of a high probability of support from its parent, Bahrain-based Ahli United Bank BSC (AUB; BBB+/Stable/bbb). AUB's core shareholder is the Public Institution for Social Security (PIfSS), an arm of the State of Kuwait (AA/Stable); and AUB's IDR is driven by our expectation of support from PIfSS. Fitch believes that support from PIfSS would likely extend to AUBUK - via AUB in the first instance - and AUBUK's Long-term IDR is as a result equalised with that of AUB.

Fitch believes that the propensity and ability of AUB/PIfSS to support AUBUK remains high. This view is underpinned by AUBUK's core role within the AUB group as the sole operation outside of the Middle East and North Africa (MENA) region. In addition, links between PIfSS and AUBUK date back to before the creation of AUB in 2000 and PIfSS's connection to the AUB group is supported by its direct shareholdings in both AUB (18.9%) and its Kuwaiti subsidiary, Ahli United Bank Kuwait (12.8%). Our view of support also considers AUB's sole ownership of AUBUK and the strong track record of support from government entities for banks in the Gulf region.

VR
AUBUK's company profile constrains the VR, reflecting the bank's limited franchise and fairly small size, particularly in view of its focus on the UK property market and primarily GCC customers. The bank's long track record as a specialist property finance lender, with its residential mortgage loan portfolio (84% of net loans) concentrated in prime central London, partly mitigates the risks. Its commercial property loan exposure is spread across the UK.

The VR also reflects AUBUK's healthy capitalisation and liquidity, and its experienced management team. AUBUK's asset quality is sound, although a large part of residential mortgage loans are granted on an interest-only basis. Average loan-to-values and loan tenors in the residential book are fairly conservative.

The bank is exposed to an inherently volatile UK commercial real estate market, although the exposure is decreasing, representing around 70% of equity at end-June 2015. AUBUK's liquidity buffers are strong, but also a necessity given its highly concentrated deposit base. Nonetheless, Fitch expects the largest deposits, which are mainly from the Gulf region, to remain fairly stable and the bank has demonstrated its ability to manage large deposit swings.

Profitability continued to improve in 1H15, but business generation has slowed, largely because of the bank's moderate appetite for lending to a highly valued central London property market. Rising regulatory costs, mainly relating to strengthening compliance and audit functions in line with current industry trends and as required by the UK regulator, limit earnings growth.

RATING SENSITIVITIES
IDRS AND SUPPORT RATING
AUBUK's IDRs and Support Rating are sensitive to a change in Fitch's assumptions around the probability of support that would be forthcoming from AUB if required. If AUBUK is no longer considered a core subsidiary of AUB, this would likely cause a downgrade of its IDR.

A rating action on AUB's IDRs, which is most likely to arise as a result of a revision of Bahrain's Country Ceiling, could be reflected in a corresponding change in AUBUK's ratings, since support is expected to flow through AUB.

VR
The bank's VR is sensitive to significant price corrections in the UK property market, should it lead to materially deteriorating asset quality and eroding capital through higher loan impairment charges.

An upgrade of the VR is unlikely unless AUBUK significantly diversifies its franchise, which is unlikely given the bank's focus and links to the Gulf region.