Fitch Ratings has downgraded Kuwait Finance House’s (KFH) Viability Rating to ‘bb+’ from ‘bbb-‘, while at the same time affirming the bank’s Long-term Issuer Default Rating (IDR) at ‘A+’ with a stable outlook.
The downgrade of KFH’s Viability Rating reflects the bank’s weak asset quality ratios, the resulting high impairment charges that continue to impact profitability, and capitalisation that is lower than some peers despite significant sector concentrations in its financing book. The Viability Rating also considers KFH’s dominant franchise in Kuwait, strong funding profile and acceptable liquidity. Upside potential for KFH’s Viability Rating would require a significant improvement in asset quality, as well as improved capitalisation given the large financing portfolio sector concentrations. Downside risk could arise from further deterioration in the bank’s risk indicators.
KFH’s IDRs and Support Ratings reflect Fitch’s view that there is an extremely high probability that the bank would receive support from the Kuwaiti authorities, if required. This view is based on Kuwait’s strong history of supporting domestic banks, KFH’s government-related shareholders and its systemic importance. A change in the IDRs would result from any changes in the ability or willingness of the Kuwaiti authorities to support KFH. Fitch does not view this as likely at present.
Operating profit decreased significantly to KD27.6m in H111 given high impairment charges (KD107.0m). Fitch expects profitability to remain under pressure in the short term as the bank attempts to improve reserve coverage, which stood at 68% at end-H111, which is low compared to some peers’.
KFH continues to have significant exposure to higher risk sectors such as real estate and investment companies. The non-performing-loans ratio remains high (11.7%) at end-H111 and these higher risk sectors could lead to additional problems.
Funding is a strength for KFH, as it benefits from an extensive and stable customer deposit base. Liquidity is adequate and benefits from cash and substantial short-term interbank Murabaha placements.
The bank’s capital ratios are low compared with peers (regulatory Tier 1 and Fitch core capital ratios of 14.3% and 15.4% at end H111), especially when considering the high sector concentrations within KFH’s loan portfolio as well as investments in associates. Moreover, unreserved impaired financing amounted to 19% of end-H111 shareholders’ equity, although collateral coverage mitigates this risk to capital.
Established in 1977 as Kuwait’s first Islamic bank, KFH is Kuwait’s second largest bank and provides a broad range of Shari’ah-compliant financial products and services. The bank is listed on the Kuwait stock exchange and the Kuwaiti government holds direct and indirect stakes totalling around 48%. International operations include banking subsidiaries in Malaysia, Turkey and Bahrain.