MARC affirms KFH Malaysia rating, long term downgraded

Malaysian Rating Corp Bhd (MARC) affirmed Kuwait Finance House (Malaysia) Bhd (KFHMB) long and short term financial institution ratings at AA+/MARC-1 while outlook on KFH's long term rating downgraded to negative from developing.

Accordingly, it said KFHMB's long-term rating outlook has been revised to negative from developing to reflect that of its parent.

The affirmation of KFHMB’s ratings follows the affirmation of the long-term and short-term financial institution ratings of its parent, Kuwait Finance House K.S.C. at AAA/MARC-1, said MARC in a statement yesterday.

This rating announcement comes two months afyer KFHMB discontinuing in June the rating services by RAM Ratings in what it said was a measure to 'be in line with the rating practices' of its parent in Kuwait and cost rationalisation.

In November 2009, RAM had put a negative outlook on the financial institution ratings of KFH, based on the deterioration in the financial metrics of both the bank and its parents.

Around that time, KFHMB chief executive officer Jamelah Jamaluddin, who was appointed in February, had requested several of its staff to go on leave pending internal investigations into transactions and contractual arrangements undertaken over the years.

In the latest report, MARC said KFHMB’s dependence on parent support has risen as the bank’s intrinsic financial strength has been visibly affected by asset quality challenges.

The near term impact of the bank’s weakened asset quality and operating performance on its capital adequacy was buffered by an injection of additional capital by KFH.

Meanwhile, KFH’s affirmed ratings reflect its systemic importance to the Kuwaiti economy as the second largest bank in the country as well as indirect majority government ownership.

KFH, the parent bank of KFHMB, is the second largest bank in Kuwait in terms of asset and is also one of the largest Islamic banks in the world with an extensive reach across the Middle East and a presence in Southeast Asia through KFHMB.

KFH also experienced asset quality deterioration amidst the global financial crisis with its NPF ratio weakening to 12.6% in FY08 with bulk of the incremental NPF accounted for by credit exposure in the real estate and construction and financial services (mostly investment houses) sectors which were badly affected during the crisis.

Although a marginal improvement in gross NPF was seen in FY09, which resulted in a gross NPF ratio of 11.8%, MARC notes that this was largely a function of an enlarged financing book, as absolute NPF remained relatively unchanged during FY2009.

Although a marginal improvement in gross NPF was seen in FY2009, which resulted in a gross NPF ratio of 11.8%, MARC notes that it was largely a function of an enlarged financing book, as absolute NPF remained relatively unchanged during FY09.

Meanwhile, high loss allowances, coupled with lower financing and investment income, resulted in lower profitability with return on asset (ROA) declining to 0.66% in FY09 from 1.81% in FY2008. At the same time, total capital ratio declined to 15.2% at end-2009 from 21.7% in the previous year.

MARC noted KFH’s capital ratios remain within Kuwaiti banking standards and above minimum regulatory requirements. Noting the pressure on KFH’s stand-alone credit profile, MARC continues to draw comfort from the very high likelihood of sovereign support for the bank.

The absence of a sustained recovery in KFH’s financial performance or a weakening in support from the Kuwaiti government would trigger a downward revision of the parent bank’s ratings.

At the same time, any weakening in support from KFH towards the subsidiary KFHMB may result in a downward revision of the latter’s ratings.

(This story, written by Siti Radziah Hamzah, appeared in The Malaysian Reserve on August 4, 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)