Kuwait Finance House not out of the woods

The problems are mounting for the largest Sharia-compliant lender in Kuwait. The asset quality and profitability of Kuwait Finance House (KFH) has "materially deteriorated", the ratings agency Standards & Poor's (S&P) says. In a note late on Wednesday, S&P placed an "A minus" long-term rating on KFH, "with negative implications". "The rating action reflects our view that the material deterioration of asset quality indicators and reduced revenue-generating capability, linked to the bad performance of equity and real estate markets, have negatively affected KFH's financial profile," said Nicolas Hardy, a credit analyst with S&P.

Many regional lenders such as KFH invested heavily in local equity markets and had huge direct and indirect exposure to a once red-hot property market through their investment subsidiaries and direct holdings. But the value of those investments has dropped greatly, putting considerable stress on the banks' balance sheets. This has prompted ratings actions from agencies such as S&P that increase the risk profile of these lenders and the cost they have to pay to raise funds.

On the plus side in KFH's case, the bank is still a leader in Kuwait's Islamic finance sector and has adequate capitalisation, good financial flexibility and strength from significant government support. Mr Hardy said S&P would analyse in detail the bank's exposures to the property and construction sectors, and the performance of the bank's operations and activities outside of Kuwait. The agency will pay special attention to KFH's banking subsidiaries in Turkey and Malaysia before it resolves the negative rating.

Shares of KFH, the second largest lender in the country by market value, yesterday gained 2 per cent to 1.020 dinars but they are more than 21 per cent lower than their 12-month peak in June last year. @Email:[e-mail]