CREDIT ANALYSIS REPORT

KUWAIT FINANCE HOUSE (MALAYSIA) BERHAD - 2019

Report ID 6053 Popularity 986 views 43 downloads 
Report Date Dec 2019 Product  
Company / Issuer Kuwait Finance House (Malaysia) Bhd Sector Finance - Financial Institution
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Rationale

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

The ratings are based on MARC’s expectation of strong support from KFH Malaysia’s parent company, Kuwait Finance House KSC (KFH) on which MARC has affirmed its public information FI rating of AAA/Stable. KFH’s FI rating continues to reflect a very high likelihood of support from the Kuwaiti government due to the bank’s high systemic importance as the second-largest bank in Kuwait. KFH Malaysia’s long-term FI rating of AA+ is notched down from parent KFH’s FI rating of AAA.

As at end-June 2019, KFH Malaysia’s gross financing for 1H2019 declined by 6% to RM5.5 billion as the bank strengthened efforts to rebalance its financing portfolio by expanding its retail segment. However, growth from retail financing has remained subdued. MARC views the bank’s aim of growing its retail segment as challenging given its small market reach and the competitive domestic Islamic banking environment. The bank intends to overcome its limited branch network by enhancing its digital banking platform.

The bank’s asset quality continued to be challenging with its gross impaired financing (GIF) ratio increasing to 5.02% as at end-June 2019 (2018: 4.59%), higher than the domestic Islamic banking industry average of 1.56%. The increase was due to higher impairments of RM275.2 million (2018: RM267.3 million), mainly from the real estate segment. As a result, financing loss coverage ratio declined to 82.6% (2018: 87.7%). KFH Malaysia’s capitalisation remained strong, providing some buffer against any further asset quality weakness. Common Equity Tier 1 (CET1) capital and total capital ratios rose to 27.7% and 28.8% as at 1H2019 (2018: 25.4%; 26.6%) as risk-weighted assets (RWA) declined in tandem with the bank’s lower financing base.

The bank’s profitability remains at a modest level and continued to benefit from financing write-backs from recoveries. For 2018, KFH Malaysia registered higher pre-tax profit of RM32.2 million from pre-tax profit of RM9.2 million in the previous year, mainly contributed by higher impairment write-backs. The bank’s profitability is susceptible to large impairments in its wholesale portfolio. Additionally, the bank’s cost-toincome ratio remains much higher compared to the industry average. The bank’s funding profile remained volatile given its dependence on wholesale deposits which accounted for 93.0% of the bank’s total deposits from customers excluding deposits from financial institutions as at end-June 2019. This risk is mitigated by its holding of substantial liquid assets as reflected by its liquidity coverage ratio of 170.7%, higher than Bank Negara Malaysia’s (BNM) minimum requirement of 100% for 2019.

KFH Malaysia continues to leverage on its parent’s business expertise and benefits from the well-recognised KFH franchise. KFH is the second-largest bank in Kuwait with total assets of KWD18.7 billion (equivalent to RM257.8 billion), accounting for 27.5% of the Kuwaiti banking system as at end-June 2019. KFH’s capital adequacy remained strong with Tier 1 and total capital ratios standing at 15.9% and 17.5% as of end2018; its asset quality has continued to improve, with the GIF ratio declining to 2.23% as at end-2018 (2017: 2.86%, 2016: 2.90%, 2015: 3.45%). KFH is currently undergoing a merger exercise with Ahli United Bank of Bahrain (AUB). While the focus of the group will be on the merger exercise, MARC understands that KFH Malaysia will continue with the bank’s existing business strategy in the interim.

The stable outlook on the ratings reflects MARC’s expectation that KFH will maintain its ownership of the bank and provide parental support. Any perceived weakening in parental support from KFH and/or dilution of its ownership in KFH Malaysia would trigger a rating action to lower KFH Malaysia’s ratings.

Major Rating Factors

Strengths

  • Strong capitalisation; and
  • Significant parental support.

Challenges/Risks

  • Weak asset quality metrics;
  • Challenges in growing retail financing segment; and
  • Reliance on wholesale funding.

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