October 16, 2017 / 2:47 PM / 5 months ago

Fitch Affirms Kuwait Finance House at 'A+'; Upgrades VR to 'bb+'

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has affirmed Kuwait Finance House's (KFH) Long-Term Issuer Default Rating (IDR) at 'A+'; the Outlook is Stable. Fitch has also upgraded the bank's Viability Rating (VR) to 'bb+' from 'bb'. The VR upgrade incorporates 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. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR 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 Domestic-Systemically 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. This 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 Short-Term IDR of either 'F1' or 'F1+'. In the case of KFH, we opted for 'F1', the lower of the two Short-Term 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 believes 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% 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. Fitch also considers the benefits of KFH's improving risk controls, supported by additional group integration. KFH's financing quality is improving. The Fitch calculated impaired financing ratio is continuously declining (2.7% at end-1H17) and problem financing generation is very low. However, the group's asset-quality is weakened by watchlist, restructured and legacy financing, primarily due to foreign subsidiaries' activities. Reserve coverage is high and Fitch believes this is necessary in light of the bank's significant exposures to more challenging markets than Kuwait. KFH's higher-than-peers net special commission margins (due to its regional and international presence and large low-cost retail deposit base), cost efficiency and optimisation across the group have supported the group's profitability. However, the bank is exposed to volatility risks, including impairment charges, especially in more unstable operating environments than Kuwait. KFH's capital ratios have improved (the FCC ratio was 16.1% at end-1H17) and compare well with peers. The group's divestments and substitution of equity securities by sukuk have reduced risk weighted assets and supported capital ratios. This has partially offset the implementation of Basel 3. The capital's risk absorption capacity is adequate, supported by improving asset-quality and concentration below peers'. The dividend pay-out ratio is relatively high. Fitch believes that KFH has the capacity to raise capital if needed and that expected divestments from non-core assets will continue to underpin capitalisation. KFH's funding has been historically stable and diversified, supported by its large retail franchise (retail deposits represented 70% of Fitch calculated customer deposits at end-1H17). As a result, KFH's deposit concentration is lower than peers' (the 20 largest deposits represented only 11% of the total at end-1H17). Funding stability mitigates liquidity maturity mismatches. KFH's liquidity is well managed and liquidity risk remains contained. The Fitch calculated financing/deposits ratio (75% at end-1H17) is the lowest among peers and the bank is a net placer in the interbank market. Liquidity flexibility is underpinned by a large stock of liquid assets (25% of total assets and 33% of customer deposits at end-1H17). RATING SENSITIVITIES IDRs, SR, SRF KFH's IDRs, SR and SRF are sensitive to a change in Fitch's assumptions around the Kuwaiti authorities' propensity or ability to provide timely support to the banking sector. At present, we do not consider there is much likelihood of any change. VR Upside potential for KFH's VR would require further improvement in profitability and asset quality, in line with the bank's ongoing restructuring plan. Downside pressure on the VR could result from significant weakening of asset quality, especially from the bank's Turkish subsidiary or from any further regional expansion. The rating actions are as follows: Long-Term IDR: affirmed at 'A+'; Outlook Stable Short-Term IDR: affirmed at 'F1' VR: upgraded to 'bb+' from 'bb' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gilbert Hobeika Associate Director +44 20 3530 1004 Committee Chairperson Eric Dupont Senior Director +33 1 4429 91 31 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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