Both Fitch and Capital Intelligence have delivered their latest diagnosis of Kuwait Finance House's financial strength, but have come to different conclusions.
Cyprus-based CI rated KFH as BBB+ with a foreign currency long and short term rating of A+ and A1. Fitch, however, was less positive and downgraded KFH's rating to 'BB+' from 'BBB-', while at the same time affirming the bank's long-term issuer default rating at 'A+' with a stable outlook. Fitch downgraded KFH on the bank's weak asset quality ratios, the resulting high impairment charges that continue to impact profitability and capitalization that is lower than some peers despite significant sector concentrations in its financing book.
Fitch said that it would review its rating if it saw evidence of a significant improvement in asset quality, as well as improved capitalization given the large financing portfolio sector concentrations. It said that downside risk could arise from further deterioration in the bank's risk indicators. Fitch did acknowledge that there was a high probability that the bank would receive support from the Kuwaiti authorities if required.
CI on the other hand affirmed its positive outlook on the back of its analysis that KFH had a strong financial status due to the support of the government and the shareholders, which reflected the strength of the capital base and the diversification of sources of revenues.
Rory Keelan, senior credit analyst for CI told The Islamic Globe: "We had already dropped KFH's financial rating by a notch last year, when we clearly flagged that unless they get NPLs down and loan loss coverage up, the ratings 'may' come under pressure. Essentially we had already seen the asset quality deterioration trends and preliminary interim numbers last year so the end 2010 numbers were no surprise so we left things as 'stable' this time."
He continued: "As to impairment, although at CI we tend to like to see high provisions - we want the money to remain in a bank rather than being paid out in dividends - and although capitalization is lower than some peers, Basle II has not been kind to KFH because it has to deduct so much from Tier 1 capital because of its ALAFCO and Sharjah Islamic Bank holdings."
Neither Fitch nor KFH responded to requests for comment by the time the paper went to press.
© The Islamic Globe 2011
