KUWAIT FINANCE HOUSE K.S.C.P.
Fitch Ratings has affirmed
Fitch has also affirmed the bank's Viability Rating (VR) at 'bb+'.
Key Rating Drivers
KFH's IDRs reflect potential support from the Kuwaiti authorities, if needed. This considers
The 'F1' Short-Term IDR is the lower of two options mapping to an 'A' Long-Term IDR because a significant part of KFH's funding is related to the government and a stress scenario for KFH would likely come at a time when the sovereign itself is experiencing some form of stress.
The VR reflects KFH's high-risk appetite, with significant operations in more challenging markets than
Key Rating Driver 1
Government Support: The Kuwaiti authorities have strong ability and willingness to provide support to domestic banks irrespective of the banks' size, franchise, funding and level of government ownership. This view considers the authorities' record of support for the domestic banking system. High contagion risk among domestic banks is an added incentive for the state to provide support to any Kuwaiti bank if needed, to maintain market confidence and stability.
Key Rating Driver 2
Leading Islamic Franchise: KFH is the largest Islamic bank in
Key Rating Driver 3
High Risk Appetite: KFH's single-obligor concentration is high, albeit it is lower than peers. The bank has significant operations in weaker and more volatile markets than
Key Rating Driver 4
Asset-Quality Pressures Contained: KFH's impaired financing ratio decreased to 1.7% at end-2021 from 2.3% at end-2020, but the Stage 3 financing ratio (as per CBK IFRS 9 norms) is higher at 3.2% at end-2021 due to curing restrictions imposed by the
Key Rating Driver 5
Recovering Profitability: KFH's net profit improved by 68% in 2021 owing mostly to lower impairment charges, stable funding and operating costs, and exceeded pre-pandemic levels. Fitch expects KFH's profitability to improve in 2022 in the context of expected growth, higher profit rates and stable impairment charges and operating expenses.
Key Rating Driver 6
Only Adequate but Stable Capitalisation: KFH's common equity Tier 1 ratio (15.2% at end-2021) and tangible leverage (9.5%) were slightly down in 2021 mostly due to losses from foreign-exchange revaluation reserves and financing growth. The
Key Rating Driver 7
Strong Funding and Liquidity: KFH's strong funding profile is supported by large retail deposits (73% of customer deposits at end-2021; much larger than peers) and current and saving accounts (52%), which are contractually short-term, but behaviorally stable.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of KFH's Long-Term IDR would require a downward revision of the bank's Government Support Rating (GSR). The latter would likely stem from a weaker ability to support, reflected in a Kuwaiti sovereign downgrade, which is not our base case considering the Stable Outlook on the sovereign rating.
A weaker propensity from the Kuwaiti authorities to support KFH would also lead to a negative rating action, but this is unlikely in Fitch's view, given the strong record of supporting domestic banks.
Aggressive growth or considerable weakening in the risk profile of foreign markets where KFH operates that place significant pressure on asset quality and capital could lead to a downgrade of the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of KFH's Long-Term IDR could come from an upward revision of its GSR. The latter would likely stem from a stronger ability to support, reflected in a Kuwaiti sovereign upgrade. However, this is unlikely in the near term given the already high level of the GSR and the recent downgrade of the sovereign.
Lower credit risk exposures to volatile markets, including
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The trust certificate issuance programme's senior unsecured long- and short-term ratings are in line with and driven solely by KFH's IDRs of 'A' and 'F1'. This reflects Fitch's view that default of these senior unsecured obligations would reflect a default of KFH in accordance with Fitch's rating definitions. The trust certificate issuance programme is housed under
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The programme's ratings are sensitive to a downgrade of KFH's IDRs. The ratings may also be sensitive to changes to the roles and obligations of KFH under the sukuk's structure and documents.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The programme's ratings are sensitive to an upgrade of KFH's IDRs.
VR ADJUSTMENTS
The Operating Environment score of 'bb+' has been assigned below the 'bbb' category implied score due to the following adjustment reason: International Operations (negative).
The Business Profile score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: Market Position (positive).
The Funding and Liquidity score of 'bbb+' has been assigned above the 'bb' category implied score due to the following adjustment reason: Deposit Structure (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
KFH's IDRs are driven by an extremely high probability of support from the Kuwaiti sovereign.
ESG Considerations
Islamic banks need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure relevance score of '4' for KFH (in contrast to a typical ESG relevance score of '3' for comparable conventional banks), which has a negative impact on the banks' credit profiles in combination with other factors.
In addition, Islamic banks have an Exposure to Social Impacts score of '3' (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations imbedded in their operations and obligations, although this only has a minimal credit impact on the entities.
Except for the matters discussed above, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
Entity / Debt
Rating
Prior
senior unsecured
LT
A
Affirmed
A
senior unsecured
ST
F1
Affirmed
F1
LT IDR
A
Affirmed
A
ST IDR
F1
Affirmed
F1
Viability
bb+
Affirmed
bb+
Government Support
a
Affirmed
a
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Additional information is available on www.fitchratings.com
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