MARC has commented that Kuwait Finance House (Malaysia) Berhad's (KFHMB) ratings of AA+/MARC-1 are not affected following its first quarter earnings announcement for 2012, in which it also reported an after tax loss of RM596 million for the financial year ended December 31, 2011. Although the bank's balance sheet strength had been impacted by the huge losses due largely to provisioning for non-performing financing facilities, its capitalisation remained strong, with a risk-weighted capital ratio of 18.4% (end-June 2011: 25.5%).

KFHMB's longstanding non-performing financing facilities have been a drag on the bank's performance in recent years. MARC believes that the bank's improved operating performance in the first quarter of 2012 and the reduced potential for unexpected material impairments that could weaken profitability or capitalisation levels, suggest reduced downside risks to the bank's creditworthiness.

The bank posted a pre-tax profit of RM23.1 million for the first quarter of 2012. MARC expects further recovery in profitability in the subsequent quarters, factoring the potential for additional impairment to decline from their peak in 2011. In addition, MARC believes that the strong support from parent Kuwait Finance House K.S.C. (KFH) should also mitigate further weakening of the bank's credit profile.
 
MARC's long-term rating on KFHMB is notched down from the AAA financial institution rating the rating agency maintains on KFH. The rating approach continues to reflect the rating agency's opinion that there would be an extremely high probability support from the parent bank if required. MARC's national scale AAA rating on the 49% government-owned bank, in turn, reflects a very high probability of systemic support from the Kuwait government. The rating agency's assessment of government support continues to consider the willingness and capacity of the Kuwait government to provide support to the country's largest Islamic bank. 

KFH, meanwhile, had earlier announced a consolidated profit of KD37.1 million (USD133.2 million) after tax and zakat for 2011, down from KD71.8 million (USD257.7 million) in 2010. The group's results were impacted by a sharp increase in credit and investment impairment charges. Nonetheless, the group's asset quality metrics as at end 2011 remained near 2010 levels; its non-performing financing facilities reduced to KD721.5 million (USD2.6 billion) (2010: KD910.9 million or USD3.3 billion) with the benefit of write-offs against specific provisions. Given the high level of impairment charges taken to date, the risk of further large impairments should be reduced unless there is a deterioration in the economic environment in the group's key markets. The group's substantially increased general provisioning levels for its financing facilities provide additional comfort.  

Apart from the systemic importance of the bank in Kuwait, KFH's strong banking franchise, sound liquidity and funding profile and its satisfactory capital position continue to underpin its rating. KFH has developed a five-year strategic plan to improve the bank's domestic operating performance, streamline the group's investment portfolio and increase coordination across its international banking subsidiaries. Notwithstanding management's actions to improve the group's operating performance, MARC acknowledges challenges facing the bank which notably include a sluggish Kuwait economy and management of the inherent risks posed by the significant sectoral concentrations in its financing book.

MARC will conduct a reassessment of KFHMB's ratings in the event there is a weakening in parental support, the parent's financial strength or Kuwait's sovereign creditworthiness.

Contacts:
Milly Leong, +603-2082 2288/ milly@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.