Kuwait Finance House - ratings affirmed with stable outlook

The strong brand and domestic franchise are two of the main supporting factors for the 'BBB+' FSR. Other supporting factors include the strong customer deposit base, especially within Kuwait, and the diversified earnings base across geographies and business lines. The main constraining factors are an asset quality which remains under strain and declining profitability.

Although declining, at this point capital adequacy is not seen as a significant constraining factor although it may become so in the near future, if internal capital generation does not considerably improve. Concerning asset quality, it should be noted that the headline figures for non-performing exposure include very significant levels of watch-list items. Although these exposures have continued to perform, KFH management has chosen to make judgmental classifications and provisions against these items.

The Support level remains at '2', reflecting a very high level of expected support that is based on both significant, quasi-governmental ownership and on the systemic importance of KFH to the Kuwaiti banking sector. It is because of this support that the FC Ratings were re-affirmed at their current high level despite the bank's weakening financial profile. The Outlook on all ratings remains 'Stable' in the expectation that 2012 will see the stabilisation of asset quality and possibly also some improvements in both profitability and capital adequacy. However, should these expected improvements not materialise, it is all ratings - rather than merely the Outlook - which would come under pressure.

KFH was incorporated in March 1977 as the first Islamic bank in Kuwait. Almost 50% of shares are owned by government related entities, including the Kuwait Investment Authority with 24.1%. With end- 2011 total assets of $46.7bn, KFH remains Kuwait's largest Islamic bank, as well as being the second largest financial institution and commands significant market shares of loans, deposits and assets. In Kuwait, KFH controls several subsidiaries involved in Islamic finance and investments, real estate trading and investment, real estate management and aircraft leasing.

However, this lead position in the sharia-compliant segment of the Kuwaiti economy does not come without cost - KFH was also the lead banker to many of the real estate and investment companies that ran into trouble from 2008 onwards, some of which were either subsidiaries or associates. Nevertheless, the Bank continues to benefit from a well established domestic franchise, which is complemented by a growing international presence in markets where there is substantial demand for Islamic banking products and services such as Turkey, Malaysia and Bahrain.