Kuwait Finance House – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Kuwait Finance House K.S.C.P. (KFH or the Bank) at ‘A+’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed KFH’s Bank Standalone Rating (BSR) of ‘bbb’, Core Financial Strength (CFS) rating of ‘bbb+’ and Extraordinary Support Level (ESL) of Very High. The Outlook on the LT FCR and BSR remains Stable.

The four-notch uplift of the LT FCR above the BSR is based on an ESL of Very High. The ESL takes into account the government’s 38% ownership of KFH, the Bank’s prominent market position in the Kuwaiti banking sector as the second-largest bank in the country (and the leading Islamic FI), the government’s strong track record of providing assistance to banks in the event of need, the existence of a state guarantee on all deposits placed inside Kuwait, and the very strong financial capacity of the government to provide support.

KFH’s FCRs reflect the Bank’s good financing asset quality, specifically a low level of non-performing financings (NPFs), and a significant buffer with a high level of provisions, particularly general provisions. Additionally, the Bank has very good capitalisation including the CET 1 ratio, a satisfactory liquidity profile, and good profitability at both the operating and net levels.

The Bank’s BSR is derived from a CFS rating of ‘bbb+’ and an adjusted Operating Environment Risk Anchor (OPERA) of ‘bbb-’. The adjusted OPERA is lower than the OPERA of Kuwait (‘bbb’) due to the Bank’s considerable exposure to assets and earnings in higher-risk countries, particularly to more volatile Turkiye through its subsidiary Kuveyt Turk Participation Bank, in addition to (but to a lesser extent) Egypt and Bahrain.

KFH acquired Ahli United Bank (AUB), a conventional bank headquartered in Bahrain that itself had a large Islamic banking subsidiary in Kuwait, in 2022, bringing on board assets of KWD12bn. The acquisition gave KFH a stronger presence across most of the GCC region, as well as in Egypt. Internationally, KFH has banking activities in seven countries.

The CFS reflects KFH’s solid capitalisation, good financing asset quality and very good loss absorption capacity, together with a strong revenue profile. Margins are sound, and the Bank enjoys a relatively low cost of funds. KFH’s profitability at the operating level is amongst the highest in the peer group in Kuwait, and core earnings are good, driven by financing income. The Bank also records a good ROAA. Operating profit advanced in 2024, but net profit dipped slightly last year owing to a much higher net monetary loss, connected to its Turkish subsidiary. The increase in the net monetary loss was due to the continued inflation and significant maturity of CPI-linked sukuk.

KFH has a strong position domestically in addition to a diversified income stream from its international operations. International operations contribute the majority of operating income and net profit but could also be an area of volatility. This is also the case with KFH’s investment income but nonetheless usually makes a positive contribution to the bottom line. Efficiency remains good. Synergies with AUB on the cost side are expected to materialise mainly in 2025, as integration was concluded in 2024. Q1 25 net profit was higher by 13% at KWD189mn, and operating profit up by 17% at KWD234mn. Net financing income remained strong. We expect sound results for full-year 2025.

KFH has the leading Islamic banking franchise in the Kuwaiti banking sector, with strong market positions in retail and corporate banking. Its asset base is far more diversified internationally than other Kuwaiti banks. Despite diversifying the asset base and income stream, and providing greater growth potential, operations in Turkiye and certain other markets with lower-rated sovereigns increase credit risk and also the onus on risk and strategic management. There is FX risk related to the investments in foreign subsidiaries, in particular in Turkiye. Any revaluation losses go through OCI and could have an impact on capital adequacy.
KFH’s financing asset quality remained good in 2024 with a low level of NPFs against gross financing. KFH’s credit loss absorption capacity is strong due to its high financing-loss coverage (including a significant level of general provisions) and high extended NPF coverage ratio. Profitability at the operating level is sound, thus giving comfortable absorption capacity. KFH’s high capital ratios provide a further buffer for any potential credit losses. Q1 25 financing details show Stage 3 financing comprised 2.5% of gross financing, marginally higher than the 2.3% at end-2024. Stage 2 financing comprised a relatively high 12.0% at end-March 2025 (2024: 11.4%). At end-Q1 25, KFH’s provisions exceeded expected credit loss required as per Central Bank of Kuwait IFRS 9 by KWD552mn (USD1.8bn).

The funding base has satisfactory diversification through core customer deposits, deposits from NBFIs, sukuk and bank funding, as well as capital. The Bank’s liquidity ratios are sound in our view. The core customer deposit base is sizeable, fairly low cost and stable, and forms just under two-thirds of liabilities and capital. Liquidity remained satisfactory in Q1 25. All regulatory liquidity ratios are comfortably above the minima.

KFH is well-capitalised with a solid CAR and CET 1 ratio, and good buffers in place. Capital ratios strengthened in 2024 as risk-weighted assets declined and shareholders’ equity increased through the issue of new shares and retained earnings. Ratios remained sound at end-Q1 25 with CET 1 at 15.0% and CAR at 19.4%.

There remain certain heightened risk areas within KFH’s balance sheet and operations. The balance sheet contains large exposure to real estate and construction, including investment properties particularly in the GCC region, other investment securities such as sukuk/bonds, and investments in associates and subsidiaries. The latter includes quite large exposure to the low-grade sovereign Turkiye and, as such, FX risk (through capital invested), as well as credit risk. Investment properties form the majority of unquoted investments. Although diversifying earnings, the profile and structure of the asset base does elicit some earnings volatility. Other challenges include some concentration in the customer deposit base, particularly connected to government or quasi-government agencies. This issue is prevalent for the entire Kuwait banking sector.

Rating Outlook

The Stable Outlook indicates that the ratings are unlikely to be altered in the next 12 months.

Rating Dynamics: Upside Scenario

The likelihood of an upward revision in the ratings or the outlook over the next 12 months is low. As financial metrics remain solid and resulting ratings are at a good level, improvement is not seen as being likely over the next year. If the operating environment were to improve in key markets where KFH is active (or assets fall in higher-risk environments), there may be an upward adjustment in the OPERA which could result in an upgrade in the BSR.

Rating Dynamics: Downside Scenario

A one-notch downgrade of the Bank’s LT FCR is possible in case of a significant deterioration of KFH’s standalone risk profile connected to its financial metrics, but with an emphasis on asset quality, liquidity and capital adequacy.

Contact

Primary Analyst: Darren Stubing, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Stathis Kyriakides, Senior Credit Analyst
Committee Chairperson: Rory Keelan, Senior Credit Analyst

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