Kuwait Finance House Ratings Affirmed At #A-/A-2#; Outlook Remains Negative

Stocks and Financial Services Press Releases Tuesday April 18, 2017 17:57
DUBAI--19 Apr--S&P Global Ratings

DUBAI (S&P Global Ratings) April 18, 2017--S&P Global Ratings today said it has affirmed its 'A-/A-2' long- and short-term counterparty credit ratings on Kuwait Finance House (KFH). The outlook remains negative.

The affirmation reflects our view that KFH's balance sheet derisking is progressing with a combination of divestments from noncore assets and improving asset quality indicators. It also reflects the bank's still-significant exposure to Turkey and to the real estate sector.

We now think that KFH's asset quality is comparable with its peers and that risks related to noncore assets are well reflected in our assessment of the bank's capitalization. After reaching 7.0% at year-end 2016, we project that the bank's risk-adjusted capital (RAC) ratio will be about 6.7%-6.9% over the next 12-24 months, excluding any positive impact of additional noncore assets disposals.

Given the bank's current operating environment, we are of the view that such divestments might prove harder to achieve and we think that its asset quality indicators might deteriorate slightly. The ratings on KFH balance the bank's leading domestic Islamic finance franchise against its historical--albeit reducing--volatility in its revenues, stemming from the bank's significant exposure to the real estate sector (both on the trading and lending side).

The ratings also factors in the economic risks in the bank's core operating countries (Kuwait, Turkey, Bahrain, and Malaysia) and the fact that KFH is mainly funded by stable customer deposits and maintains an adequate liquidity cushion. We assess the bank's stand-alone credit profile at 'bbb-'.

The long-term rating on KFH incorporates three notches of uplift for extraordinary government support in case of need, since we view the bank as highly systemically important and Kuwait as highly supportive toward the banking system.

The negative outlook on KFH reflects our negative view of the operating environment in Turkey. It also factors in the uncertainty related to the bank's capacity to continue to deliver successfully on its strategy to divest noncore assets.

We could lower the ratings on KFH in the next 24 months, if we observed higher risks in the bank's operating environment in Turkey without an improvement in the bank's capitalization, with the RAC ratio being durably above 7%. We could also consider a downgrade if we see a significant deterioration in asset quality indicators or profitability, which could result from higher credit losses in Turkey and Kuwait than we currently anticipate.

We would revise the outlook to stable in the next 24 months, if we see stabilization in the bank's operating environment while the bank's financial profile remains stable.

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