MARC has affirmed Kuwait Finance House (Malaysia) Berhad's (KFHMB) long-term and short-term financial institution (FI) ratings of AA+/MARC-1. The outlook on the ratings is stable. KFHMB’s long-term rating is notched down from the ratings of its parent Kuwait Finance House K.S.C. (KFH) in accordance with MARC’s approach to rating subsidiaries of foreign banks. The rating agency has affirmed the FI ratings of AAA/MARC-1/stable on KFH based on publicly available information. MARC’s assessment on KFHMB has taken into account KFH’s parental support to its wholly owned Malaysian banking subsidiary over the years. In this respect, MARC takes comfort from KFH’s recent announcement to reaffirm this support for its Malaysian subsidiary and to undertake a restructuring exercise to strengthen KFHMB’s operations.

KFHMB’s standalone credit profile, however, remains characterised by weak asset quality and a modest earnings performance. These factors are moderated by a strong capital position. As at end-June 2015, its Common Equity Tier 1 and total capital ratios of 18.9% and 25.0% are higher than the domestic Islamic banking industry average of 12.3% and 15.8% respectively. Despite higher risk-weighted assets driven by financing growth in the recent years, the bank’s capital adequacy ratios benefitted from full recognition of its Tier II US$100 million Subordinated Murabahah Tawarruq as a Basel III-compliant instrument.

KFHMB has maintained a conservative approach to financing since 2013, recording a modest growth of 9.2% y-o-y in gross financing in 2014 (2013: 9.1%) against a domestic Islamic industry average of 18.4% (2013: 20.0%). For 1H2015, gross financing contracted by 1.2% to RM7.0 billion, due mainly to a decline in financing to the commercial segment. As at end-1HFY2015, the bank’s gross impaired ratio stood at 7.3%. While this improved from 10.6% in 2013, the ratio remains higher than the domestic Islamic bank industry average (1H2015: 1.25%). While net financing income had been increasing on credit growth since 2013, it declined in 1H2015 due to a lower net financing margin of 2.3% (1H2014: 2.7%). The net financing margin was affected by the bank’s reliance on the costlier wholesale funding at a time when interbank money market rates have risen. Non-financing income also continued to be impacted by the lacklustre capital market environment.

KFHMB’s pre-tax pre-provision profit improved to RM26.2 million in 1H2015 (1H2014: RM22.3 million), supported by lower overhead expenses. Nonetheless, net profit in 2014 and 1H2015 was lower due to reduced impairment writebacks compared to the previous years. KFHMB’s gross financing-to-customer deposit ratio rose to 183.3% in 1H2015 (2013: 125.3%), in line with a sharp decline in KFHMB’s customer deposits to RM3.84 billion as at end-June 2015 (2013: RM5.32 billion). MARC understands the decline is in part due to the bank’s approach not to participate in a deposit price war driven by stiff competition in the banking industry. As a consequence, the share of retail deposits to total customer deposits declined to 9.3% in 1H2015 from 20.1% in 2013. The decline in customer deposits was offset by an increase in deposits and placements of banks and other FIs to RM4.4 billion in 1H2015 from RM1.9 billion in 2013. However, the increased reliance on wholesale funding poses higher funding risk to the bank.

The affirmed ratings on parent KFH continue to reflect a very high likelihood of Kuwaiti government support due to the bank’s high systemic importance in the country. In 2014, KFH’s financial performance remained relatively flat with the improvement in core earnings offset by lower non-financing income. The increase in net financing income was supported by overall improved financing growth driven by credit expansion in Western Europe and other regions. This has compensated for the credit contraction in the Middle East region, its largest market.

KFHMB’s ratings and stable outlook reflect MARC’s expectations that KFH will maintain its current rating/outlook and continue to provide parental support. Any perceived weakening in the parental support from KFH and/or dilution in its ownership in KFHMB would trigger a rating action that could result in a potential lowering of KFHMB’s ratings.

Contacts:
Joan Leong, +603-2082 2270/ joan@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.