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 Malaysia’s national rating scale.

KFH Malaysia’s long-term FI rating has been notched down from its parent Kuwait Finance House KSC’s (KFH) long-term FI rating of AAA, premised on MARC’s expectation of continued strong parental support to its wholly-owned banking subsidiary. KFH’s rating, in turn, is based on the assumption of a very high likelihood of support from the Kuwaiti government given its high systemic importance as the second-largest bank in Kuwait. KFH is majority-owned by the Kuwaiti government.

The stable ratings outlook assumes no change in the ownership structure of KFH and KFH Malaysia and that parental support from KFH will be forthcoming, if needed.

As at end-June 2018, KFH Malaysia’s asset size stood at RM9.3 billion, a modest growth of 1.2% from end-2017 following a sharp decline from RM10.8 billion as at end-2016. The decline was largely a result of KFH Malaysia shedding its low-quality assets, particularly in the corporate segment, as part of a transformation programme it undertook in 2017. The programme also included rebalancing KFH Malaysia’s financing portfolio to focus on the retail financing segment. Gross financing stood at RM5.9 billion as at end-June 2018 (2016: RM6.9 billion), of which household financing comprised 51.3%, up from 36.9% in 2016. The retail financing book, which is forecast to grow around 10% in 2018, is expected to be the key growth driver in the bank’s financing portfolio going forward.

MARC notes that the bank’s asset quality has improved with total impaired financing declining to RM368.8 million as at end-June 2018 (2016: RM478.1 million). The improvement came on the back of recoveries and lower new impairments during the period, leading to higher financing loss coverage of 91.8% as at end-June 2018 (2016: 77.2%). The gross impaired financing (GIF) ratio reduced to 6.3% (2016: 7.0%), although it remained higher than the Islamic banking industry average of 1.3%.

The rating agency observes that KFH Malaysia’s capitalisation has remained strong, providing some buffer against any further asset quality weakness. Common Equity Tier 1 (CET1) capital and total capital ratios rose to 23.4% and 31.1% (2016: 20.3%; 27.7%) as risk-weighted assets declined in tandem with the bank’s lower financing base.

For 2017, KFH Malaysia’s operating performance rebounded to register a net profit of RM5.2 million from a net loss of RM28.3 million in the previous year, mainly on the back of lower impairments and higher non-financing income. Net financing income fell due to lower gross financing and a decline in the net financing margin to 1.74% from 1.88%.

For 1H2018, net financing income rose y-o-y, benefiting from a hike in the overnight policy rate during the period. Net profit rose to RM33.0 million in 1H2018 (1H2017: RM27.3 million). The bank’s funding profile remained volatile given its dependence on wholesale deposits which accounted for 91.6% of the bank’s total deposits as at end-June 2018. This risk is mitigated by its holding of substantial liquid assets as reflected by its liquidity coverage ratio of 176.8%, higher than BNM’s minimum requirement of 90% for 2018.

KFH Malaysia continues to leverage on its parent’s business expertise and benefits from the well-recognised KFH franchise. KFH is the second-largest bank in Kuwait with total assets of KWD17.1 billion (equivalent to RM227.8 billion), accounting for 26.5% of the Kuwaiti banking system as at end-June 2018. A potential merger with Bahrain-based Ahli United Bank BSC (AUH), which had total assets of about KWD10.0 billion as at end-2017, could further strengthen KFH’s business franchise and market presence. KFH’s capital adequacy remained strong with Tier 1 and total capital ratios standing at 16.0% and 17.8% as of end-2017; its asset quality has continued to improve, with the GIF ratio declining to 2.86% as at end-2017 (2016: 2.90%).

Contacts:
Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my