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.

KFH Malaysia’s long-term FI rating is anchored on the rating of its parent Kuwait Finance House KSC (KFH) of AAA from MARC based on public information. KFH Malaysia’s rating is notched down from the parent on the basis of its status as a strategic subsidiary of KFH. Meanwhile, KFH’s FI rating is premised on the very high likelihood of Kuwaiti government support due to its high systemic importance as the second-largest bank in Kuwait with an asset size of KWD19.4 billion (about RM263.0 billion) as at end-2019 that made up almost one-third of the country’s banking system’s assets.

KFH Malaysia continues to leverage on its parent’s business expertise and benefits from the well-recognised KFH franchise. Its performance, however, has been weighed down by weak-to-negative financing growth, asset quality issues and modest profitability. The impact of the COVID-19 pandemic has further compounded the bank’s ongoing challenges in improving its performance. Providing some mitigation against potentially higher credit impairments is the strength of KFH Malaysia’s capital position, with Common Equity Tier 1 (CET1) and total capital ratios standing at 31.3% and 32.4% as at end-June 2020.

For 1H2020, its financing base registered a broad-based decline of 13.2% y-o-y to RM4.8 billion as the COVID-19 pandemic dented consumer and business sentiments. Real estate, agriculture and manufacturing were the hardest-hit sectors in terms of financing, while financing to households declined at a slower pace. The bank is expected to continue its rebalancing efforts to focus more on the retail segment, which made up 61.8% of its financing book. Gross impaired financing (GIF) ratio rose to 6.7% as at end-June 2020 (2019: 6.0%) due to higher impairments of RM319.7 million, which were mainly from real estate. Its GIF is higher compared to industry peers. Its net loss of RM26.2 million in 1H2020 was mainly driven by modification losses of RM54.2 million from the automatic six-month moratorium. Net financing margin improved to 2.6% despite the multiple overnight policy rate (OPR) cuts. Cost-to-income ratio narrowed to 63.0% due to lower expenses and higher income from securities.

The bank’s overall funding base was anchored by business enterprises as well as government and statutory bodies while the bank’s top ten largest customer depositors accounted for nearly 40% of total deposits. Concentration risk in wholesale deposits is mitigated by the bank’s superior liquidity coverage ratio of 315.2%, which is more than three times that of Bank Negara Malaysia’s (BNM) minimum requirement.

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