Kuwait Finance House’s ratings affirmed

July 19, 2014 1:03 pm

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed the Financial Strength Rating (FSR) of Kuwait Finance House (KFH) of ‘BBB+’. The rating is supported by KFH’s dominance of the Islamic banking sector in Kuwait, as well as its large overall market share in both deposits and loans, and by the significantly improved equity base following the June 2013 rights issue. The rating is constrained by a less than satisfactory asset quality in terms of headline non-performing facility ratio (although half of this is due to the inclusion of restructured debt) and reserve coverage, and by poor profitability at the net level. Looking ahead, the growing international component of both revenues and balance sheet is likely to eventually become a supporting factor, as it will help to reduce both concentrations and any vulnerability to possible weak market conditions in Kuwait, both now and at some point in the future.

KFH remains Kuwait’s largest Islamic bank, as well as being the second largest financial institution. The Bank commands significant market shares of loans, deposits and assets.

The Support Level remains at ‘2’, reflecting a very high level of expected support that is based on both the high level of quasi-governmental ownership and the systemic importance of KFH to the Kuwaiti banking sector. As the strong response to the 2013 rights issue demonstrates, KFH should have ready access to additional equity if needed – although there is no such need at present as improvement to the capital adequacy ratio (CAR) should be possible through internal measures such as disposal of non-core assets. Based on this support, the Long- and Short-Term Foreign Currency Ratings are reaffirmed at ‘A+’ and ‘A1’, respectively. The Outlook on all ratings remains ‘Stable’ in the expectation that 2014-15 will see a significant improvement in asset quality and possibly also in profitability – at least at the operating level. However, if these expected improvements do not materialise, all ratings – rather than merely the Outlook – would come under considerable and immediate downward pressure.

KFH was incorporated in March 1977 as the first Islamic bank in Kuwait. KFH has established banking subsidiaries in Bahrain (100% owned Kuwait Finance House BSC), Malaysia (100% owned Kuwait Finance House Malaysia Berhad) and Turkey (62% owned Kuwait Turkish Participation Bank). In addition, KFH controls several other Kuwaiti incorporated subsidiaries involved in Islamic finance and investments, real estate trading and investment, real estate management and aircraft leasing (ALAFCO). In KSA, KFH has established the wholly owned subsidiaries Saudi Kuwaiti Finance House (an investment company) and Baitak Real Estate Investment Company SSC (real estate development and investment).

With end 2013 total assets of USD 57.2 billion, KFH employed more than 10,000 staff worldwide and operated 350 branches and 690 ATMs. The domestic network in Kuwait comprised 60 branches. International operations contribute almost half of total revenues.

Primary Analyst
Rory Keelan
Senior Credit Analyst
Tel: +357 2534 2300
E-mail: rory.keelan@ciratings.com

Secondary Analyst
Chris Nicolaou
Senior Credit Analyst
E-mail: chris.nicolaou@ciratings.com