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

The long-term FI rating of KFH Malaysia is notched down from its parent Kuwait Finance House KSC’s (KFH) FI rating based on the explicit intent of support extended to the subsidiary by the parent, KFH’s 100%-ownership in KFH Malaysia and the common branding that exists between the two institutions. 

KFH’s FI rating, based on publicly available information, is premised on the rating agency’s expectations of a very high likelihood that the Kuwaiti government will lend support to KFH due to its high systemic importance as the second-largest bank in Kuwait with an asset size of KWD21.8 billion (about RM284.5 billion) as at end-2021. 

While KFH Malaysia continued with its strategy of asset quality management, capital preservation and cost optimisation, the bank’s financing base further declined by 10.6% y-o-y from the level a year earlier to stand at RM4.03 billion. Retail financing, which remained the bulk of KFH Malaysia’s portfolio, fell further by 7.3% y-o-y (end-2020: -4.2%). With the bank’s status quo approach in terms of near-term strategies coupled with heightened competition, its financing portfolio is envisaged to continue its declining trend, as evidenced in further contractions in its financing base to RM3.98 billion in 1Q2022.  

Though asset quality management yielded a lower gross impaired financing (GIF) of RM272.8 million as at end-2021 (end-2020: RM317.4 million), GIF ratio has remained high at 6.8% (end-2020: 7.1%) amid the declining financing base. The slight improvement in impaired financing was a result of various relief measures, coupled with write-offs as well as recoveries. Approximately 32.7% of the bank’s total financing were under relief measures as at end-2021. While the various measures provide some relief on asset quality, clarity on customers’ repayment capabilities would only become more apparent as the bank winds down the repayment assistance. GIF ratio stood high at 6.8% in 1Q2022 and could further weaken as delinquencies may exhibit an upward trend in the quarters ahead. 

The bank’s better profit performance as at end-2021, although from a low base, was underpinned by a broader net financing margin (NFM) as well as lower provisioning expenses and modification charges. Net financing income rose 7.8% y-o-y to RM240.0 million driven by a 49-bps expansion in NFM to 3.15%. NFM expanded favourably despite the lower overnight policy rate (OPR) as deposits were repriced more efficiently than its financing book. Pre-tax profit grew to RM68.3 million; the bank’s return on assets (ROA) and return on equity (ROE) came in higher at 0.92% and 4.23%. Though profitability continued its performance going into 1Q2022, with pre-tax profit higher at RM16.7 million (1Q2021: RM11.7 million), we see limited upside to KFH Malaysia’s profitability going forward as the bank’s margin is expected to be pressured by a declining financing book and slower current and savings account (CASA) deposits given stiffer deposit competition. 

Customer deposits consistently constitute the bulk of KFH Malaysia’s funding at 69.1% as at end-2021. Although improved, the bank’s CASA deposits of 8.8%, up from the 6.2% a year earlier, still lag behind the Malaysian Islamic banking system’s average of 27.9%. Its liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) of 244.3% and 116.2% as at 1Q2022 should continue to provide some headroom against funding volatility given the bank’s reliance on short-term funding.  

KFH Malaysia’s capitalisation levels continued to provide ample headroom in cushioning further asset quality weakening. As at 1Q2022, KFH Malaysia’s Common Equity Tier 1 (CET1) and total capital ratios stood at 38.7% and 39.8%. The high ratios can be attributable to the lower risk-weighted assets (RWA) amid a declining financing book.

The stable outlook on the ratings reflects the expectation that KFH will maintain its ownership of the bank and continue to provide parental support if required. 

The rating would face downward pressure if there is an explicit decline in financial and/or operational

support from the parent.