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Press Release: S&PGR Affirms Kuwait Finance House At 'A-/A-2'; Outlook Neg

7 May 2018 10:55 am
 
 
The following is a press release from S&P Global Ratings: 
     -- On May 1, 2018, we lowered our long-term foreign currency sovereign 
rating on Turkey to 'BB-' from 'BB', reflecting what we view as increasing 
macroeconomic imbalances. The outlook is stable. 
     -- We also revised our economic risk assessment on Turkey to '7' due to 
our perception of higher risks related to foreign currency lending, more 
relaxed lending practices, and risks linked to the commercial real estate 
sector. 
     -- In our view, Kuwait Finance House's strategy to de-risk its balance 
sheet, good quality of management, and strong entrenchment in Kuwait somewhat 
mitigate risks related to the bank's significant presence in Turkey. 
     -- We are therefore affirming our 'A-/A-2' ratings on Kuwait Finance 
House. 
     -- The outlook remains negative because of the downside risks to the 
bank's asset quality indicators from its financing activities in Turkey. 
 
DUBAI (S&P Global Ratings) May 7, 2018--S&P Global Ratings today affirmed its 
'A-/A-2' long- and short-term issuer credit ratings on Kuwait Finance House 
(KFH). The outlook remains negative. 
 
The affirmation balances our view of higher risks emanating from the bank's 
operating environment in Turkey with the progress KFH has made in its strategy 
to de-risk its balance sheet and divest from non-core assets, its good quality 
of management, and the bank's entrenchment in Kuwait. 
 
On May 1, 2018, S&P Global Ratings lowered its ratings on Turkey (see "Turkey 
Ratings Lowered On Deteriorating External Performance and Higher Inflation; 
Outlook Stable," published on RatingsDirect). The downgrade reflects our 
concerns about Turkey's deteriorating inflation outlook and the long-term 
depreciation and volatility of its exchange rate, notwithstanding the central 
bank's recent decision to hike its late liquidity window rate. The rating 
action also reflects our concerns over Turkey's deteriorating external position 
and rising distress in the externally leveraged private sector. In addition, it 
reflects our view that Turkey's fiscal position is weakening as a result of 
continued public and quasi-public stimulus to the economy. 
 
We believe that the heightened risks in Turkish banks' operating environment 
have increased the vulnerability of their funding and asset quality to 
depreciation of the Turkish lira and political risks. Any marked weakening in 
economic growth could negatively affect Turkish banks' asset quality, earnings, 
and capitalization, in our view, although this is not our base-case scenario. 
Furthermore, the ongoing depreciation of the lira is damaging Turkish corporate 
borrowers' repayment ability because they carry a large open position in 
foreign currency, in our opinion. Also, potential erosion of investor 
confidence in Turkey could negatively affect banks' wholesale funding, which 
relies heavily on foreign financing sources, with a significant portion of 
external debt being short-term. Our view of the economic risks faced by the 
Turkish banking industry has worsened (to '7' from '6', on a scale of '1' to 
'10', with '1' being the lowest risk), as has our overall view of the relative 
strengths and weaknesses of the Turkish banking system, reflected in our 
Banking Industry Country Risk Assessment (BICRA) for Turkey--now Group '7', 
from Group '6' previously. 
 
Due to KFH's large presence in Turkey (30% of the bank's lending portfolio at 
year-end 2017), we now assess the bank's anchor at 'bbb-' versus 'bbb' 
previously. However, we think this drop is largely counterbalanced by the 
bank's leading domestic Islamic finance franchise, local retail entrenchment in 
Kuwait, and good progress on its strategy to divest from non-core assets and 
refocus its business on core operations. We project the bank's risk-adjusted 
capital (RAC) ratio at 6.0%-6.2% for the next 12-24 months (following our 
recent rating actions on Turkey and its BICRA), excluding any positive impact 
from the planned asset disposals. We think that KFH has managed to somewhat 
reduce the risks on its balance sheet thanks to ongoing divestment of noncore 
assets and stabilized asset quality indicators at levels comparable with 
peers'. At year-end 2017, the bank's nonperforming loans (NPLs, including 
restructured loans) and coverage ratios reached 4.3% and 107.2%, respectively. 
However, given the bank's significant exposure to Turkey's weak operating 
environment and to Kuwait's real estate sector, we think that asset quality 
indicators might deteriorate slightly over the next two years. Stable deposits 
dominate KFH's funding base and its liquidity is adequate, with broad liquid 
asset coverage of short-term wholesale funding of 2.2x at year-end 2017. 
Overall, we assess the bank's stand-alone credit profile at 'bbb-'. 
 
The long-term rating on KFH incorporates three notches of uplift for 
extraordinary government support if needed, since we view the bank as highly 
systemically important and Kuwait as highly supportive toward the banking 
system. 
 
Our negative outlook on the long-term rating reflects the downside risks to the 
bank's asset quality indicators from its financings in Turkey. We could lower 
the ratings on KFH in the next 12-24 months, if we observed a significant 
deterioration of the bank's asset quality indicators or profitability, which 
could result from higher credit losses in Turkey and Kuwait than we currently 
anticipate. We could revise the outlook to stable if the bank continues to 
deliver on its divestment plans and its asset quality indicators remain broadly 
stable. 
 
RELATED CRITERIA AND RESEARCH 
 
Related Criteria 
     -- Criteria - Financial Institutions - General: Risk-Adjusted Capital 
Framework Methodology - July 20, 2017 
     -- General Criteria: Methodology For Linking Long-Term And Short-Term 
Ratings - April 07, 2017 
     -- General Criteria: Group Rating Methodology - November 19, 2013 
     -- General Criteria: Ratings Above The Sovereign--Corporate And Government 
Ratings: Methodology And Assumptions - November 19, 2013 
     -- Criteria - Financial Institutions - Banks: Quantitative Metrics For 
Rating Banks Globally: Methodology And Assumptions - July 17, 2013 
     -- Criteria - Financial Institutions - Banks: Banks: Rating Methodology 
And Assumptions - November 09, 2011 
     -- Criteria - Financial Institutions - Banks: Banking Industry Country 
Risk Assessment Methodology And Assumptions - November 09, 2011 
     -- General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009 
 
Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed to 
them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action 
can be found on S&P Global Ratings' public website at www.standardandpoors.com. 
Use the Ratings search box located in the left column. Alternatively, call one 
of the following S&P Global Ratings numbers: Client Support Europe (44) 
20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; 
Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 
783-4009. 
 
Primary Credit Analyst:  Mohamed Damak, Dubai (971) 4-372-7153; 
                         mohamed.damak@spglobal.com 
 
Secondary Contact:  Suha Urgan, Dubai (971) 4-372-7175; 
                    suha.urgan@spglobal.com 
 
Additional Contact:  Financial Institutions Ratings Europe; 
                     FIG_Europe@spglobal.com 
 
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