Fitch Ratings has affirmed Kuwait Finance House's (KFH) Long-term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. At the same time, the agency has downgraded KFH's Viability Rating (VR) to 'bb'. A full list of rating actions is at the end of this rating action commentary. The downgrade of the VR reflects the high concentrations in KFH's financing portfolio and worsening asset quality indicators. Fitch also notes the bank reported slightly weaker regulatory Tier 1 and Fitch Core Capital ratios in H112 (13.0% and 13.4%, respectively), which lag its domestic peers'. Fitch understands that KFH plans to bolster its capital in the coming months, which would be a positive step. KFH's IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support being provided by the Kuwaiti authorities, if needed. Fitch's assessment of support is based on the financial strength of Kuwait ('AA'/Stable), KFH's government-related shareholders and the bank's importance within the domestic banking system. The bank's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's assumptions around the propensity or ability for the Kuwaiti authorities to provide timely support to KFH. However, Fitch notes the strong history of support provided by the Kuwaiti government for the banking system. The bank's VR reflects KFH's worsening asset quality indicators and capitalisation that lags its domestic peers'. The rating also considers KFH's dominant domestic franchise, strong funding profile and comfortable liquidity position. Non-performing loans (NPLs) increased to 11.6% of gross financing in H112 (2011: 8.8%), and the reserve coverage ratio slipped to 69% (2011: 81%), The NPL ratio remains notably higher than some peers', and is likely to remain so as the bank works through its non-performing exposures. In H112, profitability continued to be impacted by high impairment charges, offset by healthy revenue growth in Q112 and positive operating trends at the pre-impairment level (H112: net income of KWD50.6m, up 90% yoy). Fitch expects overall profitability to remain under pressure in the short term as the bank continues to build provisions. Risk management systems could be improved, in Fitch's view, although the bank has recently appointed a new Head of Risk with a view to significantly improving risk management oversight at the group level. Fitch views this as positive; however it may be some time before the agency can assess how effective the changes have been. KFH's funding and liquidity profile are a rating strength, in Fitch's view. As one of the largest deposit gatherers in Kuwait, KHF has an extensive and stable customer deposit base accounting for 79% of non-equity funding. Downside pressure on the VR would result from deterioration in the domestic operating environment, if it were to impact KFH's risk indicators and erode capital from its current level. Upside potential would require a material improvement in KFH's asset quality indicators, normalised impairment charges, and a stronger capitalisation that is more in line with peers'. KFH is the second-largest bank in Kuwait by total assets, and provides a wide range of sharia-compliant corporate and retail banking products to the local market. The Kuwaiti government holds a 49% stake in the bank via several public institutions, and the shares are listed on the Kuwait Stock Exchange. Ameinfo
