The Financial Strength Rating (FSR) is maintained at ‘BBB’. The ratings are underpinned by UGB’s good debt repayment record, access to term finance and short-term funding, and the sound quality of the investment portfolio.  Exposure to Bahrain is negligible. Factors constraining the ratings are the large asset and income concentrations, coupled with a relatively small balance sheet, low liquidity, dependence on market sources of funding, and ongoing weak net profitability. The Outlook for the ratings remains at ‘Stable’.  However, CI notes that in the event that profitability does not recover and / or the capital adequacy ratio (CAR) declines further in the current year, then this would exert downward pressure on UGB’s ratings.

UGB is a consolidated subsidiary of the diversified and well regarded KIPCO Group in Kuwait.  Given its role as the investment arm of KIPCO, the Bank’s business strategy and investment policy are ultimately influenced by decision making at the parent.  Indeed, the last major restructuring programme (in 2010) had been initiated at the KIPCO level and was driven by the parent’s strategic objective to reorganise its financial services businesses.  For UGB, this culminated in the effective sale and transfer of core investments in four MENA banks to Kuwait-based Burgan Bank (BB, a universal bank also KIPCO majority owned).  In exchange for the transfer of those assets, UGB acquired a strategic 18 per cent stake in associate BB.  Although UGB’s equity interest in BB produces large asset and income concentration risks, these are partly mitigated by BB’s high credit rating (‘A-’), overall sound risk metrics and systemic importance in Kuwait.  That said, UGB is dependent on a significant amount of funding (and refinance) from BB in the form of bank lending and deposits.  It is worthy of mention that BB’s shares are listed on the Kuwait Stock Exchange and therefore represent a source of liquidity for UGB in extremis. 

The overall quality of UGB’s assets has improved over the past years in part due to investment write-downs, as well as the recovery in the performance of most key associated companies and subsidiaries. FIMBank, a deposit taking institution based in Malta which is now consolidated in the financial statements after UGB acquired a majority stake in 2014, has recently undergone a major restructuring programme. Asset quality issues at FIMBank have been addressed and this has resulted in the recognition of impaired loans and large impairment provision charges.  Impaired exposures at FIMBank are currently adequately covered by loan-loss reserves.  A rights issue at FIMBank has also improved its capital adequacy and risk buffers. 

UGB’s sources of funding remained adequately diversified and complemented by ample medium-term debt. Although there continues to be reliance on short-term interbank deposits (including from KIPCO related entities) this source of funds has proven very stable over the years. BB in particular is expected to remain an important source of funding over the foreseeable future. The Bank has successfully paid down debt over the past and significantly improved leverage and reduced maturity gaps.  The increase in leverage evident in 2014 was due to the consolidation of FIMBank, which has a sizeable customer deposit base.  Although UGB’s level of liquid asset holdings remains low in relation to total assets, it continues to have adequate liquidity to repay maturing short-term debt obligations.  In addition to readily available funding from KIPCO related entities, the Bank has access to uncommitted short-term facilities through established bank relationships across the region.

Although capital adequacy declined further (as UGB raised its stake in FIMBank), it is currently at a reasonable level.  However, internal capital generation remains an area of weakness due to UGB’s ongoing weak profitability.  The consolidation of FIMBank was the major factor behind the fall in the ratio of total capital to total assets and, conversely, the larger contribution of customer deposits to total funding and of loans to total assets.  Although UGB’s operating profitability staged a strong recovery in part due to FIMBank consolidation, the latter also had an adverse impact on UGB’s net profitability through much larger impairment provisions.  It is worthy of mention, however, that excluding FIMBank, UGB recorded a substantial increase in total revenues during 2014 on the back of mainly an improved performance at BB, and to lesser extent other financial associates and subsidiaries.