Fitch Ratings has affirmed Kuwait Finance House’s (KFH) long-term issuer default rating (IDR) at A+ with a stable outlook. The viability rating (VR) has been affirmed at bb.
KFH’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s view that there is an extremely high probability of support being provided by the Kuwaiti authorities, if needed. Fitch’s assessment of support is based on Kuwait’s financial strength (AA/Stable), KFH’s government-related shareholders, the bank’s importance within the domestic banking system and the long-standing track record of support by the authorities for the Kuwaiti banking system.
KFH is Kuwait’s largest Islamic bank, and second-largest bank overall, benefiting from a sound franchise in both corporate and retail banking. It has several domestic subsidiaries and associates involved in Islamic banking and insurance, real estate and investments and subsidiaries in Malaysia, Saudi Arabia, Bahrain and Turkey. Listed on the Kuwait Stock Exchange, the Kuwaiti government holds a 49% stake in the bank via several public institutions.
Profitability strengthened in 2012 and in H113, with net profit up about 29% yoy in H113 as positive trends in business volumes and growth in operating income – both interest and non-interest income – continued. However, overall profitability continues to lag peers’ as impairment charges depress net income. Impairment charges were KWD103m in H113, absorbing about 60% of pre-impairment operating profit attributable to shareholders (i.e. after deducting profit paid to depositors).
KFH’s asset quality remains weaker than that of peers and problematic exposures will take time to work through. The improvement in asset quality indicators in 2012 was due to significant write-offs of problematic assets, which more than compensated for a continued flow of financing becoming impaired. The impaired financing ratio was 9.5% at end-H113 (from 7.7% at end-2012), although this percentage also includes loans the bank has restructured. Reserve coverage of impaired financing at 58% at end-H113 was also relatively weak.
Funding is supported by KFH’s strong deposit franchise, especially in the retail segment. The deposit base is more diversified than that of many of the bank’s peers. Capital has improved following a KWD319.5m rights issue in H113. The bank’s Tier 1 capital ratio was 16.1% at end-H113 (end-2012: 13.6% with a Fitch core capital ratio of 12.1%). Fitch notes that while KFH’s capital position has improved, the bank would still benefit from a higher cushion, in light of its high exposure to potentially problematic sectors.