KUWAIT FINANCE HOUSE (MALAYSIA) BERHAD - 2021 |
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| Report ID | 605389025 | Popularity | 741 views 27 downloads | |||||
| Report Date | Aug 2021 | Product | ||||||
| Company / Issuer | Kuwait Finance House (Malaysia) Bhd | Sector | Finance - Financial Institution | |||||
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| Rationale |
Rating action 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. Rationale 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 both 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 KWD21.5 billion (about RM285.6 billion) as at end-2020. KFH Malaysia was not spared the negative impact from the pandemic which saw a significant decline in earnings driven by higher impairment charges and modification losses. The bank implemented measures to mitigate the impact which included a cost optimisation exercise that led to a decline in overhead expenses by 20.8% y-o-y to RM130.9 million (2019: RM165.5 million) as well as proactive measures to protect asset quality. These factors notwithstanding, the bank’s strong capital position and healthy liquidity provide ample headroom to cushion against the prevailing challenging environment. For 2020, KFH Malaysia recorded a 90.7% y-o-y decline in pre-tax profit to RM2.7 million (2019: RM29.1), precipitated by sizeable impairment charges of RM54.0 million (2019: RM27.1 million) and a one-off modification loss of RM47.2 million. For 1Q2021, pre-tax profit rose to RM11.7 million on the back of higher net financing income, but over the near term, profit performance would be weighed down by heightened impairment charges as the current tough economic conditions show no signs of abating over the next 12 to 18 months. Its financing base contracted to RM4.5 billion at end-2020, led by a 21.1% decline in gross financing in the small-medium enterprise (SME) segment, and 20.4% in the corporate financing segment. Though the focus in the immediate term revolves around capital preservation, asset quality management and cost optimisation, financing appetites are likely to remain muted with the enforcement of the movement control order (MCO) 3.0, as evidenced in a further contraction of its financing base to RM4.3 billion as of 1Q2021. KFH Malaysia’s gross impaired financing (GIF) increased to RM317.4 million as at end-2020 with new impairments over the period largely accrued from the bank’s real estate and manufacturing sectors. This culminated in a higher GIF ratio of 7.1% for the same period — well above the Malaysian Islamic banking sector’s average. Asset quality concerns continued to persist going into 1Q2021 as the GIF ratio remained high at 7.1%; this could further weaken due to the challenging economic conditions. KFH Malaysia’s capitalisation remains healthy with Common Equity Tier 1 (CET1) and total capital ratios of 35.7% and 36.8% as at end-2020. The stronger capital ratios were underpinned by a 13.0% decrease in total risk-weighted assets in tandem with a lower funding base. The healthy capitalisation continued in 1Q2021, with CET1 and total capital ratios at 35.4% and 36.5%, allowing for ample headroom to cushion further asset quality weakening. Although reliant on short-term funding, with 87.5% of wholesale liabilities maturing within 12 months as at end-2020, KFH Malaysia’s liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) stood at 274.5% and 119.5%, well above the regulatory requirement. The healthy liquidity position continued into 1Q2021 supported by the bank’s LCR and NSFR of 424.0% and 126.2%. Rating outlook 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. Rating trajectory Downside scenario The rating would face downward pressure if financial and/or operational support from the parent declines explicitly. Key strengths • Significant parental support • Strong capitalisation Key risks • Weak asset quality • Profit performance remains vulnerable to impairment charges • Contraction in financing base • Reliance on wholesale funding |
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