MARC has affirmed Kuwait Finance House (Malaysia) Berhad's (KFHMB) long-term and short-term financial institution (FI) ratings of AA+/MARC-1 as well as the AAA/MARC-1 ratings on its parent, Kuwait Finance House K.S C. (KFH). The outlook on all ratings is stable.

KFHMB's affirmed ratings continue to be driven by MARC's expectation of parent support being available to the bank. MARC's top-down approach to assigning KFHMB's rating is underpinned by the rating agency's assessment of the wholly-owned subsidiary as a strategically important subsidiary and the parent's past demonstrated record of extending support. A one-notch difference between the rating of KFHMB and its parent KFH continues to be maintained.

MARC assesses the risk of potential eventual removal of parent support as low, as reflected in its stable outlook on KFHMB's ratings which mirrors that of KFH's ratings. Meanwhile the stand alone credit profile of the bank is characterised by a high level of impaired financing despite significant efforts to reduce impaired financing and subdued core profitability.

As at end-June 2013, KFHMB's gross im‎paired financing ratio remains high at 11.7%, albeit down from its year end 2012 level of 15.6%. Write-offs and reclassification of impaired financing as performing financing have been driving the improvement in the bank’s asset quality metrics, as well as slower inflow of new impaired financing. While lower than the sector average, coverage appears to be adequate in light of the slowdown in new impaired financing and high proportion of impaired financing represented by secured financing. Further improvement in the bank's impaired financing ratio is likely to come from improvement in the risk profile of borrowers, a decrease in the flow of new impairments and credit growth. MARC views positively KFHMB’s continued efforts to improve the management of the bank’s credit portfolio in the area of monitoring systems, collection processes and lending standards. The rating agency also notes that impairment allowance write-backs have been significant in respect of financing previously assessed for individual impairment while financing volumes have rise of late.

Although KFHMB returned to profitability in 2012, the bank continues to be challenged to improve its underlying profitability more into line with domestic peers. While the bank’s profitability has seen improvement, the slow credit growth environment and the bank's high cost to income ratio pose some challenges. For 1H2013, KFHMB posted a net profit of RM56.1 million, driven by a reversal of financing impairment charges, which is expected to continue to support KFHMB’s profitability during 3Q2013. The rating agency views sustained improvement in the bank’s asset performance and the greater focus the bank has given to cost control as important to support the bank's operating profitability.

KFHMB saw a decrease in customer deposits during 1H2013. Nonetheless, its gross financing to customer deposits ratio was mostly unchanged at 110% as at end-June 2013 from its end-2012 level of 111.1% due to non-existent financing growth. The capitalisation of the bank has improved as it continues to deleverage and reduce risk-weighted assets. KFHMB’s continued maintenance of capital levels in excess of the regulatory minimum will improve the resilience of the bank to adverse macroeconomic conditions. The bank's core capital ratio and risk weighted capital ratio stood at 16.0% and 20.3% respectively as of end-June 2013.

The rating and stable outlook on parent KFH incorporates MARC's view that support from the Kuwait government is highly probable if needed as a systemically important bank with leading domestic market shares of financing and deposits and the emirate's second largest bank by assets. Other credit strengths of KFH include its strong retail franchise in its home market, good geographical diversification and resilient funding base.

Since MARC's last review, KFH's profitability has improved as a result of a decline in impairment losses and growth in its financing income while its asset quality metrics has benefited from gross financing growth of 11% and write-offs during 2012. KFH reported gross impaired financing of about 9.6% of total financing, down from 11.3% as of end-2011. Its return on average assets improved to 0.88% in 2012, up from 0.29% the year before.

While some challenges on the asset quality front remain, KFH has made notable progress in diversifying the financing book by industry and geography. Its capital position has been bolstered by the issuance of new equity.

A lowering of KFH's ratings would result in the downgrade of KFHMB's ratings. A weakening of ownership and/or parental support from KFH could also exert downward pressure on KFHMB's ratings

Contacts:
Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my