Fitch affirms Kuwait Finance House at ‘A+’
KUCHING: International ratings agency Fitch Ratings has affirmed Kuwait Finance House’s ( KFH) long-term issuer default rating ( IDR) at ‘A+’ with a stable outlook.
Fitch also upgraded the bank’s Viability Rating (VR) to ‘bb+’ from ‘bb’, incorporating KFH’s reduced risk appetite to non- core banking assets, especially equity securities and investment properties.
“It also includes an improvement in the bank’s asset quality and profitability, supported by a more transparent strategy and good execution,” it said in a note yesterday.
“KFH’s IDRs are support- driven. Its Support Rating ( SR) and Support Rating Floor ( SRF) reflect Fitch’s view that there is an extremely high probability of support being provided by the Kuwaiti authorities to all domestic banks if needed.
“This is reflected in KFH’s SR of ‘1’ and SRF of ‘A+’, in line with Fitch’s actual country DomesticSystemically Important Bank SRF.”
Fitch’s expectation of support from the authorities is underpinned by Kuwait’s strong ability to provide support to its banks, as reflected by its rating (AA/Stable) and strong willingness to do so irrespective of the banks’ size, franchise, funding structure and the level of government ownership.
Fitch said the view is reinforced by the authorities’ track record of support for the domestic banking system in case of need. The Central Bank of Kuwait operates a strict regime with hands- on monitoring to ensure the viability of the banks, and has acted swiftly in the past to provide support where needed.
“There is high contagion risk among domestic banks ( Kuwait is a relatively small and interconnected market). We believe this is an added incentive to provide state support to any Kuwaiti bank if needed, in order to maintain market confidence and stability.
“The Stable Outlook on KFH’s Long-Term IDR reflects the Stable Outlook on the Kuwaiti sovereign rating. We assign Short-Term IDRs according to the mapping correspondence described in our bank rating criteria. An ‘A+’ Long-Term IDR can correspond to a ShortTerm IDR of either ‘F1’ or ‘F1+’.
“In the case of KFH, we opted for ‘F1’, the lower of the two ShortTerm IDR options.
“This is because a significant proportion of the Kuwaiti banking sector funding is related to the government and a stress scenario for the banks is likely to come at a time when the sovereign itself is experiencing some form of stress.”
VR KFH continues to benefit from a fairly stable operating environment in Kuwait despite the economic impact of low oil prices.
The bank is exposed to lower economic growth, but Fitch believed that the government’s continuing capital spending plans will partially offset the pressures.
Fitch’s assessment of KFH’s operating environment considers the bank’s exposure to the more challenging markets in Turkey, Malaysia and Bahrain. KFH has a strong franchise as the largest Islamic bank in Kuwait and the country’s second-largest bank, with market shares of about 23 per cent by assets at end-1H17.
The geographical footprint, large branch network, diversified banking and investment services, and brand strengthen the bank’s distribution capabilities, deposit collection and profit margins.
Fitch believes that the group’s structure is more complex than peers’. The bank has a strong management team, well experienced in local and regional banking. KFH’s strategic objectives are increasingly well articulated and consistent, balancing between domestic and regional/international growth.
“Management has proven capability to execute in a challenging environment. Fitch’s assessment incorporates KFH’s high risk appetite for regional and international expansion, but recognises the positive impact of divestments from equity securities, trading and investment properties, and non-performing non-core banking assets towards traditional commercial banking. KFH’s concentration by sector and single name borrower is below peers.”