MARC has affirmed Kuwait Finance House (Malaysia) Berhad's (KFH Malaysia) long-term and short-term financial institution (FI) ratings of AA+/MARC-1. The outlook on the ratings is stable.

KFH Malaysia is a wholly-owned subsidiary of Kuwait Finance House K.S.C. (KFH) on which MARC maintains FI ratings of AAA/MARC-1/stable based on publicly available information. KFH Malaysia’s FI rating of AA+ is notched down from its parent’s on MARC’s assessment of a high probability of parental support taking into account KFH’s full ownership in KFH Malaysia, record of past financial support and significant strategy guidance provided.

KFH Malaysia continued to display weak asset quality metrics despite some improvement: its gross impaired financing ratio stood at 6.71% as at end-June 2016 (end-2015: 7.43%), as compared to the domestic Islamic banking industry average of 1.33%. MARC views that KFH Malaysia’s asset quality could come under pressure given the weakening economic conditions. Partly mitigating this risk is the bank’s strong capital position, as reflected by its common equity Tier 1 (CET1) and total capital ratios of 18.9% and 25.4%, both of which are substantially higher than the domestic Islamic banking industry average of 13.0% and 16.8% respectively as at end-June 2016. KFH Malaysia’s Tier 2 capital remains supported by a subordinated Murabahah Tawarruq facility agreement with its parent KFH. The subordinated debt of US$100 million, or RM402.9 million, as at end-June 2016 is fully recognised as part of the bank’s Tier 2 regulatory capital.

For 1H2016, KFH Malaysia recorded modest profitability with net profit increasing to RM27.4 million (1H2015: RM20.9 million) due to higher impairment write-backs of RM24.1 million (1H2015: RM3.8 million). Weaker financing growth and a compressed net financing margin (NFM) continued to weigh on KFH Malaysia’s earnings. Its gross financing contracted by 1.6% from end-2015, with y-o-y growth slowing to 3.7% in 1H2016, driven by a slowdown in the corporate segment. This was offset by household financing which grew stronger by 10.3% y-o-y in 1H2016. As a result, the household financing segment’s share of the bank’s total financing increased to 33.6% as at end-June 2016 (2015: 31.4%). MARC notes that this is in line with the bank’s effort to rebalance its financing portfolio with a greater focus on the retail segment. This is also borne out by KFH Malaysia’s recent key appointments of individuals with significant experience in retail financing in Kuwait as well as in Malaysia. This notwithstanding, the bank’s small market reach in Malaysia could hamper its ability to significantly grow its retail segment.

For 1H2016, KFH Malaysia’s net financing income declined by 12.9% y-o-y to RM90.2 million (1H2015: RM103.6 million), with the annualised net financing margin narrowing to 1.85% (1H2015: 2.17%) due to its high funding costs. KFH Malaysia’s funding base remained largely comprised of wholesale deposits which accounted for 95.7% of total deposits as at end-June 2016 (2015: 96.7%). Its low-cost funding base remained small as reflected by its proportion of current and savings account (CASA) deposits to total deposits of 6.4% (2015: 7.5%). The bank’s gross financing-to-customer deposit ratio rose to 208.5% in 2015 before declining to 149.1% in 1H2016 due to a sharp increase in deposits from government and statutory bodies.

KFH’s affirmed ratings continue to reflect a very high likelihood of Kuwaiti government support due to the bank’s high systemic importance as the second largest bank in the country. On a standalone basis, KFH’s credit profile is underpinned by its strong market position as well as its solid global and home market Islamic franchise. Moderating these strengths is asset quality weakness as reflected by a high gross impaired financing ratio. While this has improved over the years, it remained elevated at 7.92% as at end-2015 (2014: 9.26%). For 2015, the bank’s profitability was boosted by higher net financing income and reduced operating costs. Its return on asset and equity rose to 1.13% and 9.14% (2014: 0.99%; 7.90%).

KFH Malaysia’s ratings and stable outlook reflect MARC’s expectations that KFH will maintain its current rating/outlook and continue to provide parental support. Any perceived weakening in parental support from KFH and/or dilution in its ownership in KFH Malaysia would trigger a rating action that could result in a potential lowering of KFH Malaysia’s ratings.

Contacts:
Joan Leong, +603-2082 2270/ joan@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.