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)

KFH probing previous contracts, transactions

By Habhajan Singh

Kuwait Finance House (Malaysia) Bhd new boss, who came on board just under two months ago, has directed more than a dozen staff to go on leave pending internal investigations into 'transactions and contractual arrangements that have been undertaken over the years'.

In an email response to queries from The Malaysian Reserve, KFH Malaysia CEO Jamelah Jamaluddin said the bank is "taking a proactive approach and conducting a due diligence status audit, in light of the different and more challenging economic environment".

She added: "This is aimed at obtaining an accurate picture of certain transactions and contractual arrangements that have been undertaken over the years. Some employees have taken leave to help facilitate the exercise and the Bank will be guided by pragmatism and act accordingly as per the recommendations of the audit team conducting the due diligence status audit."

In a communication with staff on March 19, it is understood that Jamelah had asked a number of staff, including at least one head of department, to go on leave to enable the Kuwait-based Islamic banking unit to conduct its internal investigations.

Exactly a week later, on Friday, RAM Rating Services Bhd had issued a note putting the bank on what it calls a 'negative rating watch' in connection to the "on-going due diligence status audit, which required senior credit personnel to be on leave pending the completion of this exercise."

"This event heightens concerns on the potential for further deterioration in the Bank’s asset quality and credit fundamentals," the local rating agency said.

On Friday, RAM Ratings said it had met with the senior management of KFH Malaysia to seek further clarification on the matter. The rating agency was made to understand that an "internal reorganisation exercise has been put in place to strengthen the Bank’s credit team and processes, with the intention of improving asset quality."

People familiar with the bank told The Malaysian Reserve that the latest management move is putting a strain on staff morale, with word on the ground that more suspensions could follow.

Jamelah returned to KFH Malaysia as the new boss effective Feb 9 after a stint of just over two years at RHB Islamic Bank Bhd. She was the KFH Malaysia deputy CEO, a position now held by Ab Jabar Ab Rahman, when she left to helm RHB Islamic in August 2007.

Ab Jabar was designated acting CEO when Datuk Salman K Younis left as KFH Malaysia MD/CEO on June 1, 2009. Salman, who spearheaded the establishment of KFH Malaysia in 2005, was asked to return to head office in Kuwait "to assume wider responsibilities", but continued to act as a director of the Kuwaiti bank's unit in Malaysia.

However, the latest KFH Malaysia website no longer carries his name as a director of the board, which is chaired by Shaheen Alghanem. Alghanem joined the board in March 2007 and was appointed as chairman five months later. The other Kuwaiti on board is Abdul Wahab Al-Rushood.

The three other directors, all Malaysians, are Islamic finance lawyer Mohamed Ismail Mohamed Shariff, former Mesdaq Bhd executive chairman Khairil Anuar Abdullah and former Island & Peninsular Bhd MD Dr Radzuan Abdul Rahman.

On the management side, some of the key executives at KFH Malaysia, according to information from its website, are Annis Sheikh Mohamed who heads its corporate and investment banking, Mohamed Iqbal Mohamed Iqbal (international business and treasury), Nawaf Menayekh (international distribution), Siti Mariam Mohd Desa (real estate advisory), Maimunah Alias (commercial banking), Wong Kee Poh (retail and consumer banking), Amin Siru Abdul Rahman (credit risk management) and James Chong Wai Choy (risk management).

On the financial front, the latest KFH Malaysia results available are for the first nine months for 2009, which shows it posted a net profit of RM4.62 million on the back of RM364.92 million in operating revenue, at the group level.

In a note for the financial results, KFH Malaysia had noted that notwithstanding the ‘more difficult operating environment, the Group and the Bank will continue to focus on its business growth strategies through new and competitive product offerings, products cross selling as well as exploring new business opportunities within the region and the Middle East, while remaining vigilant on the impact of the global economic crisis to its businesses and profitability’.

(This story appeared in The Malaysian Reserve on 29 March 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)

MOODY'S: Need to prioritise risk management

By Habhajan Singh
Appropriate systems and infrastructure to address risk issues need to be in place to support sustainable growth for Islamic banks, says an international rating agency.
Noting that most Islamic banks' strategies try to achieve asset growth, Moody's Investors Service said that risk management should be implemented first followed by growth.
In a report released on May 11, Moody's identified various characteristics found in strategies adopted by Islamic banks that enhance their financial strength ratings, which it said included strategies that improve franchise value, risk positioning and financial fundamentals.
"While Islamic banks in different countries operate under different environments, are at different stages of development and therefore require different strategies, we can still find a set of common characteristics among their various strategies, which benefit their long-term ratings," Christine Kuo, a Moody's vice president/senior analyst and author of the report, said in a statement.
Risk management was one of the issues raised at the 6th Islamic Financial Services Board (IFSB) Summit 2009 in Singapore between May 5-8.
In a banking forum in Kuala Lumpur on May 11, HSBC Bank Malaysia Bhd deputy chairman and chief executive officer Irene M Dorner highlighted the preparedness of regulators to modulate the Islamic finance industry, particularly when it moves beyond replication of the conventional product profitsharing and risk-sharing.
"If you move into the next phase of Islamic banking, beyond the conventional products — the profitsharing, risk-sharing, and so on — I'm not sure how you can regulate that," she told the 13th Malaysian Banking Summit 2009.
The issue of regulation is closely tied to risk management.
In its report, Moody's said that when it comes to global comparisons, it is more important for Islamic banks to build strong franchises in selective markets and businesses, and to maintain sound financial profiles as opposed to big balance sheets.
The report assesses strategies adopted not just by Islamic financial institutions (IFIs), whose scope of business must comply with Shariah law, but also conventional banks which operate Shariah-compliant departments.
According to the report, while size is important — as diversification is harder when an institution is small — banks that enjoy dominant positions in smaller but more favourable markets may have a higher franchise value (which could translate into greater earnings stability) than a bigger bank with a highly price-sensitive customer base operating in a competitive market.
"It follows that it is better for Islamic banks to have a strategy that helps achieve a stronger position in a few selective markets than one which results in marginal positions in many competitive markets," adds Kuo.
The report notes that Islamic banks tend to have greater concentration in assets and liabilities compared with conventional banks, and face challenges in managing liquidity and risk due to the limited range of instruments available.
Moreover, Islamic products are less commoditised and require more tailoring and oversight leading to substantial overheads and operation risk.
"Additionally, for Islamic banks with significant exposures to equities and properties, conservative financial leverage is particularly important in view of the volatility in the values of these investments," notes Kuo.

(This story appeared in The Malaysian Reserve on May 18, 2009. 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)

Bank Muamalat puts in measures to strengthen operations, says STAR

Bank Muamalat Malaysia Bhd has put in place a new management team and shored up its capital substantially. Its latest risk-weighted capital ratio was 18% compared with 12.12% at end-December last year. RAM Ratings has reaffirmed its current ratings of “negative” outlook despite the challenging environment, reports The Star (Apr 9 2009).
Datuk Mohd Redza Shah Abdul Wahid, the former chief operating officer of DRB-HICOM Bhd, became Bank Muamalat chief executive officer at end-2008 in a management revamp following the purchase of a 70% stake in the bank by DRB-HICOM. A five-year business plan has been drawn up to position Bank Muamalat as a pure Islamic bank.
“The new approach looks more towards syariah principles in decision-making and in being more selective in its target customer base,’’ Redza told StarBiz.
The report continues:
Bank Muamalat is also pursuing similar business areas in the DRB-HICOM group, such as property and motor vehicle. An IT infrastructure that is fully compliant with systems in the Gulf Cooperation Council is being put in place.
“Proactive measures have been put in place to immediately improve the asset quality issues. Stringent credit evaluation process and active recovery measures are being pursued,’’ Redza added.
Net non-performing financing ratio was at 4.1% at end-December 2008.
Last month, Bank Muamalat completed a capital-raising exercise involving the issuance of 500 million shares to its shareholders, DRB-HICOM (70%) and Khazanah Nasional Bhd (30%). This effectively raised the bank’s total capital to RM1bil.
In its report, RAM Ratings pointed to stable funding and liquidity positions at the bank. However, it was concerned about further deterioration in asset quality.
Acknowledging the new measures put in by the new management, RAM Ratings said it needed more time to evaluate them.
Other factors cited were limited franchise (Bank Muamalat is seeking a strategic partner), erratic profitability (pre-tax profit of RM41.3mil in the financial year ended December 2005 (FY05); RM104.8mil in FY06; RM65.5mil in FY07) and impairment losses.

Four Dubai banks placed on ratings watch

By Habhajan Singh
Four Dubai-based banks have been put under ratings watch due to "growing concerns regarding the impact on the banking sector of the economic downturn in Dubai".
Standard & Poor's Ratings Services have placed on credit watch with negative implications its longterm counterparty credit ratings on Emirates Bank International PJSC (EBI), National Bank of Dubai (NBD), Mashreqbank and Dubai Islamic Bank (DIB).
The rating agency said the "A-1" short-term ratings on EBI, NBD, and Mashreqbank were also put on credit watch with negative implications, while the "A-2" short-term rating on DIB was affirmed.
"This action reflects our growing concerns regarding the impact on the banking sector of the economic downturn in Dubai," it said in a statement. These banks have a hand in Islamic banking.
MashreqBank, the largest private bank in the United Arab Emirates (UAE), is involved in Islamic finance via its subsidiary Badr Al-Islami. DIB badges itself as the world’s first full Islamic bank.
S&P said the outlook for Dubai's economy has worsened relative to last year and the global economic downturn has been hurting some of Dubai's key economic sectors including trade, tourism, and commerce.
"Demand in the all-important real estate sector also continues to show clear signs of stress, with indications that a sharp correction is underway.
"As a result, we expect Dubai's economy to contract between 2% and 4% in real terms in 2009, putting pressure on banks' asset quality and profitability.
"Dubai is a small open economy that can do little to shield its key sectors from the impact of a fall in external demand in the coming months," it said.
S&P said the rating actions on EBI, NBD, and DIB also reflect its concerns that the government may use these banks to support the refinancing that is soon coming due of the debt of other government-related entities (GREs).
"We have already noticed that these banks are important participants to the refinancing of Borse Dubai's debt that matured in February 2009.
"We understand that these banks received deposits to neutralise the impact on their liquidity profile," the ratings firm said. Taking into account the important amount of Dubai GRE debt that is soon coming due, S&P believes that additional directed lending to these entities would increase credit and concentration risk.
On a positive note, it said Dubai's establishment of a US$20 billion (RM72.91 billion) bond programme at the government level and issuance of US$10 billion that was fully subscribed by the UAE central bank somewhat alleviate liquidity pressure.
"We are concerned about Dubaibased banks' exposure to the real estate sector — about 20% of total loans at year-end 2008 — in light of the marked deterioration of this sector," it said.

(This story appeared in The Malaysian Reserve on Mar 23, 2009. 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)

MOODY'S: IFIs show ‘impressive resilience’ to crisis

By Habhajan Singh
Islamic financial institutions (IFIs) in the Gulf Cooperation Council (GCC) countries showed "impressive resilience" to the crisis to date due to the core principles of Islamic banking which prohibits both speculation and interest rates, according to Moody's Investors Service.
Another contributing factor to IFIs in the Middle East displaying strong resilience amid the current global financial debacle is their strong growth and typically conservative approach, the international rating agency added in a "special comnment" report released last week.
The resilience of Islamic banks has become a hot topic in the financial market with a number of conventional banks reeling from the effects of the credit crisis. Jurisdictions like Hong Kong continue to show interest in making inroads into Islamic finance.
In a recent speech, Hong Kong Monetary Authority (HKMA) deputy chief executive Eddie Yue said that the Islamic finance industry is in many ways fortunate to be at an early stage of development during this turmoil. Nonetheless, Moody's notes that IFIs do not operate in isolation from their local, regional and international environments.
"They have therefore been facing three series of cyclical challenges, reflecting their current structural strengths and weaknesses," it said. Firstly, they are finding it more difficult to manage their short-term liquidity. Secondly, their investment portfolios, which are concentrated on illiquid and cyclical asset classes, have been impaired, and finally, their access to long-term funding has been postponed, forcing them to reduce the maturity profile of their assets, the report said.
However, Moody's expects that such constraints will prove only temporary and that Islamic banks have the capacity to weather the storm.
In the report entitled "Gulf Islamic Banks Resilient Amid Global Credit Woes", Moody's said global Islamic banking assets grew around 27% in 2007 and a growth of 20%-30% is expected this year as well.
"Although 2009 will likely be a tough year for Islamic banks, they benefit from a number of buffers: their credit portfolios have been essentially domestic, with limited pressure on asset quality so far; they have strong retail platforms, with high customer loyalty and deposit stability; and their high capitalisation and ample core liquidity often provide a relatively high amount of confidence to counterparts," says Anouar Hassoune, Moody's vicepresident and senior credit officer and author of the report.
As a result, Moody's expects IFIs in the Gulf region to be able to continue growing, albeit at a slower pace, before resuming a more rapid growth, most probably within 18 months. Paradoxically, it said the IFIs' reputation has benefited from the current crisis, reflecting their conservative approach to business, a close proximity to their domestic and regional franchise, their balanced and ordered appetite for growth, and focus on the basics of banking as opposed to innovation.
"All these factors, which used to be perceived as weaknesses before the credit crisis began, are now being used as shields against the potential damages of imported stress. "As a result, in the shortterm, in times of crisis, clients may find it more comfortable doing business with an Islamic bank," said Hassoune.
(By Habhajan Singh. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays)