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-'. The Support Rating is affirmed at '2'. A full list of rating actions is available at the end of this rating action commentary.

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), and ultimately from AUB's core shareholder, the Public Institution for Social Security (PIfSS), an arm of the State of Kuwait (AA/Stable). Fitch believes that if required, support for the bank is likely to flow through AUB and therefore AUBUK's ratings are effectively constrained by Bahrain's Country Ceiling of 'BBB+'.

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. The strong links between PIfSS and AUBUK date back to before the creation of AUB in 2000 and are supported by PIfSS's direct shareholdings in both AUB (18.9%) and its subsidiary, Ahli United Bank Kuwait (12.8%). Our view also considers AUB's sole ownership of AUBUK and the strong track record of support from the state for banks in Kuwait and the Gulf region.

KEY RATING DRIVERS - VR
AUBUK's company profile constrains the VR, reflecting the bank's limited franchise and relatively small size, particularly in view of its focus on the UK property market. The bank's long track record as a specialist property finance lender, with its residential mortgage loan portfolio (85% of 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 conservative.

The bank is also exposed to an inherently volatile UK commercial real estate market, although the exposure represents 100% of equity. 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, because of the bank's conservatism regarding the sustainability of high property values in central London. Furthermore, rising regulatory costs, mainly relating to strengthening compliance and audit functions as required by the UK regulator, limit performance 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 and ultimately from PIfSS 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 is likely to be reflected in a corresponding change in AUBUK's ratings.

RATING SENSITIVITIES-VR
The bank's VR is sensitive to significant price corrections in the UK property market, which could lead to 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.

The rating actions are as follows:

Long-term IDR affirmed at 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '2'
Viability Rating affirmed at 'bbb-'