Kuwait Finance House (Malaysia) Bhd - 2008

MARC has assigned long term and short term financial institution ratings of AA+/MARC-1 to Kuwait Finance House (Malaysia) Berhad (KFHMB). The ratings carry a stable outlook. The ratings of KFHMB are anchored to MARC’s AAA/MARC-1 financial institution ratings on Kuwait Finance House KSC (KFH) on the basis of an explicit intent of support extended to KFHMB by KFH. KFH’s ratings reflect its leading Islamic banking franchise, strong profitability, and sound capitalization. Further, MARC believes that KFH, which is 43% owned by the Kuwait government would be supported by the authorities in a stress scenario in light of its systemic importance to the Kuwait banking system. Notwithstanding the parent support element, MARC regards the financial profile of KFHMB to be robust.

KFH is the second largest bank in Kuwait in terms of assets and one of three Islamic banks in its home country of Kuwait. KFH is also the Gulf’s and the world’s second largest Islamic bank by market value. Apart from KFH’s dominant retail franchise in Kuwait which is reflected in its large market share of deposits of over 20%, it also maintains a leading Islamic banking franchise in the Gulf Cooperation Council (GCC) countries. The expansion of its overseas business has helped alleviate concentration risk and improve KFH’s earnings diversity. MARC notes that KFH’s overseas subsidiaries/branches are increasingly contributing to the group’s revenue.

KFH has experienced strong growth in its gross receivables (FY2007: 40.7%) in recent years whilst maintaining high credit quality on the back of a buoyant economy supported by high oil prices. Meanwhile, KFH’s net profit increased strongly by 68.4% to KD325.4 million in FY2007, mainly contributed by its retail and corporate banking activities. KFH’s strong profitability was attributable to the rapid growth of its asset base as well as its widening net financing margin. The bank’s capital adequacy ratio is considered sound at 23% as at end of 2007 (FY2006: 19%).

KFHMB is the first foreign Islamic bank to be licensed in Malaysia. KFHMB’s current strategy is to develop its Islamic investment banking business with corporates and high net worth individuals as primary target segments. The bank is a strategic business unit of the KFH Group and is the group’s regional base and platform to launch  and develop the KFH franchise in East Asia. KFHMB’s generally robust financial profile is  derived  from  its healthy  asset quality, well-diversified  banking  book across industry segments, and strong earnings growth. Since its inception in 2005, KFHMB has been able to leverage its parent’s well-established Islamic banking franchise and product development capabilities to grow its Syariah-compliant business. The bank has recorded strong total assets and financing assets growth, from RM3.0 billion and RM0.8 billion respectively as at end-2006 to RM7.8 billion and RM4.5 billion, respectively as at end of June 2008. For 2QFY2008, KFHMB recorded a net profit of RM21.7 million (FY2007: RM20.3 million) with income primarily stemming from its commercial and corporate banking activities and treasury operations.

The stable ratings outlook reflects MARC’s expectations that there would be no material reduction of KFH’s support to KFHMB as well as a stable outlook for KFH’s ratings. No request was made for a rating on KFH; the analysis supporting the rating is based on review of primary and secondary sources of information in the public domain as well as information provided to MARC by KFHMB.

Strengths

• Strategic regional subsidiary of KFH, the second largest Islamic bank in the world;
• Explicit intent of support extended by its parent company; and
• Innovative roll-out of Islamic banking products with product support from parent company.

Challenges/Risks

• To increase the relative contribution and scale of its retail banking business; and
• Concentrated funding profile.