The long-term FI rating of KFH Malaysia is notched down from its parent Kuwait Finance House KSC’s (KFH) FI rating based primarily on our assessment of the explicit intent of support the parent has extended to KFH Malaysia and its 100% ownership in the bank. KFH’s FI rating of AAA/Stable, based on publicly available information, is premised on our expectations of a very high likelihood that the Kuwaiti government will lend support to KFH due to its high systemic importance as the second-largest bank in Kuwait with an asset size of KWD21.5 billion (about RM285.6 billion) as at end-2020.

KFH Malaysia’s performance remains impacted by asset quality issues, exacerbated by the pandemic-induced economic conditions. The bank recorded higher impairment charges as well as undertook one-off modification losses in 2020, leading to pre-tax profit falling by 90.7% y-o-y to RM2.7 million. Financing contracted from RM5.0 billion to RM4.5 billion, led by a decline of 21.1% in gross financing in the small and medium enterprise segment, and 20.4% in the corporate financing segment. For 1Q2021, pre-tax profit rose to RM11.7 million; nonetheless, asset impairment issues are likely to persist and impact profitability in the near term.

Against this backdrop, KFH Malaysia has focused on capital preservation with common equity tier 1 and total capital ratios standing at 35.7% and 36.8% as at end-2020, which provide a strong buffer to absorb further asset quality deterioration to some degree. The stronger capital ratios were underpinned by a 13.0% decrease in total risk-weighted assets in tandem with a lower financing base. The bank remains reliant on short-term funding, with 87.5% of wholesale liabilities maturing within 12 months as at end-2020; its liquidity position is strong, reflected by liquidity coverage ratio and net stable funding ratio of 274.5% and 119.5%, both of which are well above the regulatory requirement.