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Rating Action:

Moody's affirms A1 deposit rating of Kuwait Finance House; upgrades BCA to baa3 from ba1

27 May 2019

Limassol, May 27, 2019 -- Moody's Investors Service ("Moody's") has today affirmed A1 / Prime-1 long- and short-term domestic and foreign currency deposit ratings of Kuwait Finance House K.S.C.P (KFH). At the same time, Moody's upgraded KFH's baseline credit assessment (BCA) and adjusted BCA to baa3 from ba1. The outlook on KFH's long-term ratings remains stable.

The upgrade of KFH's BCA to baa3 from ba1 reflects sustained improvements in the bank's asset quality and earnings, through de-risking the balance sheet by divestures and sale of non-core assets and focusing on core banking activities.

Despite the BCA upgrade to baa3, KFH's long-term deposit ratings are affirmed at A1 as the deposit rating already benefits from a very high government support which, following the BCA upgrade, translates into five notches of uplift.

A full list of the ratings is provided towards the end of this press release.

RATINGS RATIONALE

-- AFFIRMATION OF DEPOSIT AND COUNTERPARTY RATINGS

The affirmation of KFH's A1 deposit ratings reflects Moody's expectation of a very high probability of government support in case of need. This very high government support now translates into five notches of uplift from the bank's higher baa3 BCA, compared to six notches previously. Kuwaiti banks benefit on an average from four notches of uplift from government support. KFH's five notches reflect (1) the bank's systemic importance in Kuwait, given its domestic market share of around 24%, and its large retail deposit base and global Islamic banking franchise; (2) its aggregate 48% direct and indirect ownership by various Kuwaiti government entities which is the highest in Kuwait; and (3) Kuwaiti authorities' long track record of transparency surrounding the provision of support to distressed banks.

-- UPGRADE OF BCA

The upgrade of the BCA to baa3 from ba1 reflects Moody's view that the bank's (1) asset quality improvements are expected to be sustained and (2) ongoing divestment of legacy exposures has improved earnings quality and profitability. The upgrade also takes into account the bank's solid capital and liquidity buffers.

ONGOING DIVESTMENT OF LEGACY EXPOSURES SUPPORTS EARNINGS QUALITY

The primary driver for the upgrade the ongoing improvements in earnings quality as KFH continues to focus on exiting non-core investments and growing its core banking business in domestic and key international markets. As a result of the continued divestments and asset sales of these non-core investments which included equity, investments in associates and joint ventures and real estate property developments, the bank's reliance on inherently volatile investment income has reduced. The investment book represents around 12% of total assets as of December 2018 down from 27% as of December 2013. Consequently, such investments now contribute only 8% of total operating income for 2018 down from around 34% in 2013.

Continued execution of this strategy is supporting the creation of a more efficient management structure, with increased visibility of operational and credits risks. KFH's management infrastructure is now better placed to meet the needs of its geographically dispersed network of subsidiaries. While the above strategy has improved the risk profile of the bank, its underwriting standards have also changed positively. The bank follows the best practices with detailed credit analysis and focus on underlying cash flows compared to the earlier approach of more asset backed lending.

The upgrade also captures the bank's strong and improved profitability, with KFH's net income to tangible assets improving to 1.5% for 2018 (1.2% for 2017) from 0.90% for 2014. At this level, it is higher than both the 1.3% Kuwaiti system average and the 0.9% global median for banks' with baa3 BCAs.

Going forward, Moody's expects net profitability to remain stable around current levels as the bank will maintain strong yields and grow margins while they continue to exit non-core investments reducing income volatility.

ASSET QUALITY IMPROVEMENTS WILL BE SUSTAINABLE

The upgrade also captures the bank's significant and sustainable improvements of asset quality and coverage. The bank's nonperforming financing ratio (NPF analogous to NPL ratio) has declined to 2.2% as of December 2018 after reaching a peak at around 11.4% as at March 2014 (all calculations include Moody's adjustments). This decline has primarily been driven by commercial restructurings, write-offs and modest growth of the financing book, influencing the denominator effect. Despite these improvements, KFH's NPF ratio is slightly higher than the Kuwaiti system average of around 1.6% but lower than the 2.6% global median of banks with baa3 BCAs.

At the same time, the financing loss coverage has also significantly improved and stood at 172% of NPF balances as of December 2018, compared to 62% at year-end 2013. At this level, this ratio is lower than the Kuwaiti average of 284% however, significantly higher than the global median of baa3 banks' at 71%.

RATING OUTLOOK

The long-term ratings of KFH will continue to have a stable outlook. The stable outlook reflects the bank's robust capitalization and liquidity, counterbalanced by sector concentration and weaker operating conditions in some geographies where the bank operates in.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the bank's BCA could develop from any combination of the following: (1) further improvements of bank's asset quality and profitability without significantly increasing risk, (2) a continued reduction in the bank's non-core legacy investments.

Upward pressure on the bank's deposit rating could develop if its BCA is raised and the five notches of uplift owing to government support is maintained.

Downward pressure on the bank's BCA could develop in the event of (1) a significant deterioration in the macroeconomic conditions in the countries in which the bank operates; (2) any deterioration in the bank's asset-quality; or (3) a weakening in the bank's capitalization or profitability.

Downward pressure on KFH's deposit rating could develop from a lowered BCA and/or a reassessment of our assumptions of support from the government, which currently translates into a very high five notches of uplift.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Kuwait City, Kuwait Finance House reported total assets of around KWD18.4 billion (USD60.6 billion) as of March 2019.

The local market analyst for these ratings is Nitish Bhojnagarwala, +971 (423) 795-63.

LIST OF AFFECTED RATINGS:

..Issuer: Kuwait Finance House K.S.C.P.

Upgrades:

.... Adjusted Baseline Credit Assessment, Upgraded to baa3 from ba1

.... Baseline Credit Assessment, Upgraded to baa3 from ba1

Affirmations:

.... Long-term Counterparty Risk Assessment, Affirmed A1(cr)

.... Short-term Counterparty Risk Assessment, Affirmed P-1(cr)

.... Long-term Counterparty Risk Rating, Affirmed A1

.... Short-term Counterparty Risk Rating, Affirmed P-1

.... Long-term Bank Deposits, Affirmed A1, Outlook Remains Stable

.... Short-term Bank Deposits, Affirmed P-1

Outlook Action:

....Outlook Remains Stable

..Issuer: KFH Sukuk Company SPC Limited

Affirmations:

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A1

Outlook Action:

....No Outlook assigned

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alexios Philippides
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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