Rating action          

MARC Ratings has affirmed its long-term and short-term financing institution (FI) ratings of AA+/MARC-1 on Kuwait Finance House (Malaysia) Berhad’s (KFH Malaysia) with a stable outlook.

The long-term FI rating of KFH Malaysia is notched down from the rating of its parent Kuwait Finance House KSC (KFH) of AAA/Stable based on public information. The one notch differential reflects MARC Ratings’ views of KFH Malaysia as a strategic subsidiary of its parent and the explicit intent of support extended to the subsidiary by the parent. This view is supported by KFH’s 100%-ownership in KFH Malaysia and the common branding that exists between the two institutions.

KFH’s FI rating is premised on the rating agency’s expectations that the Kuwaiti government will continue to extend support to KFH due to its very high systemic importance as the largest bank in Kuwait and the government’s key ownership in the bank. In October 2022, KFH completed its acquisition of Ahli United Bank (AUB) via a share swap agreement rendering KFH the second-largest Islamic bank globally with an asset book of KWD37.0 billion (about RM533.0 billion), only behind Al Rajhi Bank of Saudi Arabia with KWD62.0 billion (about RM893.5 billion).

MARC Ratings notes KFH Malaysia’s focus on asset quality management and capital preservation, a strategy in place since the pandemic, has continued to weigh on its financing portfolio. Gross financing contracted further by 4.6% y-o-y to RM3.8 billion as at end-2022. This trend is not expected to reverse going forward unless there is a change in its growth strategy. Heightened competition in the Islamic banking space would challenge any growth prospects. 

MARC Ratings views the decline in KFH Malaysia’s gross impaired financing (GIF) to RM263.6 million (end-2021: RM272.8 million) was supported by the various relief measures extended to its customers. That said, the decline in the bank's financing book has contributed to its GIF ratio of 6.9% over the same period, a slight uptick from 6.8% a year prior. While the proportion of relief measures has declined to about 16% of its financing book as at end-2022 (end-2021: 29%), further easing of relief measures will continue to pose credit risk. Of these, more than 50% have commenced payments as per their revised schedule while less than 3% have missed payments and subsequently been classified as impaired. The concern on delinquencies is mitigated by the bank’s impaired financing coverage ratio of 145.0% as at end-2022 (end-2021: 131.2%). 

Common equity tier 1 (CET1) and total capital ratios of 41.1% and 42.2% as at end-2022 (end-2021: 38.5% and 39.6%) provide some headroom to absorb credit losses. Capitalisation levels are expected to remain broadly stable over the next 12-18 months with the bank’s lending activities foreseen to remain muted in the near term. 

KFH Malaysia remains largely reliant on wholesale deposits in financing its operations; retail deposits made up a small 9.5% of customer funding as at end-2022. Deposits, which fell 10.6% y-o-y to RM3.5 billion, have been increasingly concentrated among government agencies, which formed close to half of customer deposits as at the same date. The low proportion of individual deposits leaves KFH Malaysia prone to a degree of deposit concentration risks. The bank’s proportion of low-cost current and saving (CASA) deposits of 8.6% as at end-2022 continues to lag behind the industry’s average of 25.9%. Over the same period, the bank’s liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) came in at 173.9% and 118.5%. 

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

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

support from the parent.