MARC has affirmed Kuwait Finance House (Malaysia) Berhad's (KFHMB) long-term and short-term financial institution ratings of AA+/MARC-1, following the rating agency's affirmation of the long-term and short-term financial institution ratings of its parent, Kuwait Finance House K.S.C. (KFH) at AAA/MARC-1. The outlook on the ratings of both institutions has been revised to stable from negative.

The long-term rating of KFHMB is notched down from KFH on the basis of ongoing support from the parent. The ratings on KFHMB continue to be underpinned by MARC's view of KFHMB's status as a strategic subsidiary of KFH. The subsidiary shares the same brand name as the parent and operates in an important geographic market for the group. At the same time, MARC notes residual, albeit abating, pressure on KFHMB's standalone financial profile, stemming from impaired credits in its financing portfolio and its weak profitability. Nonetheless, the bank remains well-capitalised owing to an earlier capital injection in 2009; its capital strength continues to provide important and sustained support for its standalone credit profile.

Meanwhile, KFH's affirmed ratings reflect MARC's confidence that timely government support would be available to the bank should it be needed. As Kuwait's second largest bank, KFH is perceived by MARC to be a systemically important bank. The bank's ratings also reflect its indirect majority government ownership, strong franchise in its home market and in the GCC region, and healthy capitalisation. As reflected in the rating outlook revision, KFH's asset quality and its profitability have been affected by the downturn in Kuwait and other GCC economies, but the bank is showing signs of stabilising asset quality due to the improving economic environment in its key markets.

KFHMB's gross non-performing financing (NPF) ratio rose to 14.1% as at end June 2011 from 12.0% as at end December 2010 due to its shrinking financing base. MARC notes a slight decline in the bank's gross NPF to RM780.8 million during the first six months of 2011 (1H2011) due to its continuing efforts to reschedule and restructure impaired financing including special mechanism with the support from the Parent while at the same time still managing the NPF accounts. MARC views the aforementioned as evidence of ongoing parental support; this would help alleviate asset quality pressures at the subsidiary while the improving economic situation works its way through to the impaired credits.

KFHMB's asset quality is expected to improve at a fairly slow pace over the near-term given the concentration of the bank's impaired financing in the real estate whose recovery has lagged other economic sectors. Reserve coverage of NPF declined to 58.5% at end-June 2011; the rather low level reflects the bank's reliance on real estate collateral coverage. The bank's capital, in particular its Tier-1 and total capital adequacy ratios at end-June 2011 of 21.8% and 25.5% respectively, provides important support to its stand-alone credit profile in the context of its asset quality metrics.

Sharply lower financing impairment charges of RM19.0 million recorded for the first six months of 2011 (full year 2010: RM191.3 million) helped KFHMB to post a modest net profit of RM5.3 million. The bank's profitability measures are likely to remain subdued in the immediate future. In the longer run, the rating agency expects the bank's initiatives to grow both its retail and wholesale banking business under the bank's five-year strategic business plan to support a gradual improvement in its credit metrics.

The parent bank of KFHMB, KFH is a government-related entity in which the state has an indirect shareholding of 48%. KFH's asset quality remains under pressure; its gross NPF ratio hit 14.5% as at end-December 2010 as a result of financing exposures in the real estate and construction sectors as well as investment companies. It’s financing impairment charges which remained elevated in 2010 continued to weigh on the bank's profitability. Compared to 2009, the bank's profitability has largely held up, aided by satisfactory control of expenses. Meaningful improvements in its return on asset and equity measures, however, remain subject to improvement on the asset quality front. MARC's interim concern over the continuing pressure on KFH's asset quality and profitability metrics is balanced by Kuwait's improved operating environment, the bank's still comfortable capitalization buffer which affords satisfactory credit loss absorption capacity.

The absence of a sustained recovery in KFH's financial performance or a weakening in support from the Kuwait government would trigger a downward revision of the parent bank's and KFHMB's ratings. Any perceived or observed weakening in parental support from KFH will also exert pressure on KFHMB's ratings.

Contacts:
Ahmad Rizal Farid, +603-2082 2253/ arizal@marc.com.my;
Anandakumar Jegarasasingam, +603-2082 2250/ kumar@marc.com.my;
Milly Leong, +603-2082 2288/ milly@marc.com.my.