Kuwait Finance House (Malaysia) Berhad (KFHMB) announced recently that it is in the midst of conducting a due diligence status audit on certain past transactions and contractual arrangements of the bank with a view to strengthen its credit processes, and ultimately, asset quality. MARC does not see any immediate rating implications for KFHMB's financial institution ratings of AA+/MARC-1.

At a meeting with both the Chairman and CEO of KFHMB, further clarity was provided to MARC on the scope of the ongoing audit and its implications for KFHMB’s asset quality and capital adequacy metrics. MARC was also informed that the parent, Kuwait Finance House K.S.C (KFH), has injected USD150 million (approximately RM514 million) into KFHMB as additional capital in December 2009. The foregoing provides assurance that there has been no weakening in the level of parent support to KFHMB. MARC believes that this equity injection will place KFHMB on a stronger footing to absorb any additional credit write downs or provisions that maybe required.

KFHMB's long-term and short-term financial institution ratings of AA+/MARC-1/ Developing Outlook continue to be based on a top-down approach, which links the ratings and rating outlook of the subsidiary to the financial institution rating of AAA assigned to its parent, KFH.

At this juncture, MARC believes that the recent events have not affected the basis of KFHMB's ratings enough to alter the ratings or outlook. MARC expects to conduct a full review of the ratings assigned to KFH and KFHMB, once the audited financial statements of KFHMB for full year 2009 are made available.

A primary focus of the review is likely to be the quality of the credit portfolios of both parent and subsidiary, the deterioration of which had earlier prompted MARC to revise its outlook to developing from stable on November 02, 2009. KFH's gross NPF ratio had weakened to 12.6% at end-2008 (end-2007: 3.8%) as a result of its exposure to sectors which were affected by the global economic downturn. KFHMB’s gross NPF ratio also weakened significantly to 8.8% at end-September 2009 (end-2008: 0.9%).

MARC will continue to monitor the longer-term implications of current internal reorganisation and other initiatives to address weaknesses in credit risk management and internal controls which are concurrently taking place with the audit exercise.

Contacts:
Anandakumar Jegarasasingam, 03-2090 2250/ kumar@marc.com.my;
Taufiq Kamal, 03-2090 2251/ taufiq@marc.com.my;
Lim Kok Seng, 03-2090 2272 / kokseng@marc.com.my