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Fitch affirms kuwait finance house at a+; outlook stable


(The following statement was released by the rating agency) LONDON/BANGKOK, September 09 (Fitch) Fitch Ratings has affirmed Kuwait Finance House's (KFH) Long-term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. The Viability Rating (VR) has been affirmed at 'bb'. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS - IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR KFH's IDRs, Support Rating and Support Rating Floor reflect Fitch's view that there is an extremely high probability of support being provided by the Kuwaiti authorities, if needed. Fitch's assessment of support is based on Kuwait's financial strength (AA/Stable), KFH's government-related shareholders, the bank's importance within the domestic banking system and the long-standing track record of support by the authorities for the Kuwaiti banking system. RATING SENSITIVITIES - IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR A change in the IDRs, Support Rating and Support Rating Floor would result from a change in Fitch's assessment of the ability or willingness of the Kuwaiti authorities to support KFH. RATING DRIVERS -VR The VR reflects the high sector concentrations in KFH's loan portfolio and the bank's weak asset quality and profitability. Capitalisation strengthened in H113, following a KWD319.5m rights issue. However, capital remains only adequate in light of on-going asset quality issues. On the positive side, the rating also takes into account KFH's dominant domestic franchise and strong funding profile. The bank's efforts to restructure and streamline its business, and strengthen and integrate risk management, support the affirmation. A significant proportion of KFH's financing, leasing and direct investment portfolio is exposed to higher-risk sectors, in particular construction and real-estate - a common feature of the Kuwaiti banking sector, which reflects the relatively undiversified nature of the wider economy. In addition, the bank has a complex organisational structure, and historically lacked a coordinated approach to risk management of its various divisions, subsidiaries and affiliates, making it more difficult to get a clear view of potential risks. These issues should to some extent be addressed by the restructuring. Profitability strengthened in 2012 and in H113, with net profit up about 29% yoy in H113 as positive trends in business volumes and growth in operating income - both interest and non-interest income - continued. However, overall profitability continues to lag peers' as impairment charges depress net income. Impairment charges were KWD103m in H113, absorbing about 60% of pre-impairment operating profit attributable to shareholders (ie after deducting profit paid to depositors). KFH's asset quality remains weaker than that of peers and problematic exposures will take time to work through. The improvement in asset quality indicators in 2012 was due to significant write-offs of problematic assets, which more than compensated for a continued flow of financing becoming impaired. The impaired financing ratio was 9.5% at end-H113 (from 7.7% at end-2012), although this percentage also includes loans the bank has restructured. Reserve coverage of impaired financing at 58% at end-H113 was also relatively weak. Funding is supported by KFH's strong deposit franchise, especially in the retail segment. The deposit base is more diversified than that of many of the bank's peers. Capital has improved following a KWD319.5m rights issue in H113. The bank's Tier 1 capital ratio was 16.1% at end-H113 (end-2012: 13.6% with a Fitch core capital ratio of 12.1%). Fitch notes that while KFH's capital position has improved, the bank would still benefit from a higher cushion, in light of its high exposure to potentially problematic sectors. RATING SENSITIVITIES - VR Downside pressure on the VR would result from deterioration in the domestic operating environment, if it were to adversely affect KFH's asset quality and erode capital from its current level. In addition, downside pressure could arise if recent management changes do not continue to drive improvements in operational control and coordinated risk management. Upside potential would require a significant improvement in asset quality and continued strengthening of the bank's capitalisation. KFH is Kuwait's largest Islamic bank, and second-largest bank overall, benefiting from a sound franchise in both corporate and retail banking. It has several domestic subsidiaries and associates involved in Islamic banking and insurance, real estate and investments and subsidiaries in Malaysia, Saudi Arabia, Bahrain and Turkey. Listed on the Kuwait Stock Exchange, the Kuwaiti government holds a 49% stake in the bank via several public institutions. The rating actions are as follows: Long-term IDR affirmed at 'A+'; Stable Outlook Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'bb' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Contact: Primary Analyst Laila Sadek Director +44 20 3530 1308 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Redmond Ramsdale Director +971 4424 1202 Committee Chairperson Philip Smith Senior Director +44 20 3530 1091 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.this site Additional information is available on this site Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 15 August 2012, and 'Evaluating Corporate Governance' dated 12 December 2012, are available at this site. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW. FITCHRATINGS. COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Money markets deposit rate uncertainty opens trade opportunity


* Prospect of negative deposit rate still on table* Market pricing suggest 20-30 pct chance by early 2013* Lack of clear consensus drives trading strategyBy William JamesLONDON, Sept 17 For euro zone money market traders, one big question is driving prices: will the European Central Bank cut the rate it pays on overnight deposits below zero?The answer has major implications for funds that specialise in eking out a return through short-term lending while keeping risk at a bare minimum for their investors."If you lower the deposit facility below zero it will have an amplified effect on all money market papers -- especially those with higher rating -- and will increase the struggle of funds to provide yield to their investors," said Alessandro Giansanti, strategist at ING in Amsterdam. But, for investment banks trading in short-term instruments, the uncertainty has generated a potentially profitable pricing discrepancy.

The Eonia lending rate, the price the market pays on overnight loans, is heavily influenced by the deposit rate and current levels suggest modest expectation of a cut. Citigroup strategists say that based on forward contracts there is a 20 percent chance of a cut priced in by February but highlight that the calculation is far from clear because deposit rates have never before fallen below zero in the currency bloc. Among factors muddying the waters, a cut to below zero could see correlations used for forecasting break down, the central bank could take unforeseen unorthodox policy steps or liquidity could drain from the market and generate volatility.

Using a different forecasting methodology, JPMorgan strategists see the current probability of a cut at 9 percent for next month, rising to 28 percent for a cut in January, while Barclays Capital say the ECB is unlikely to venture into uncharted waters and do not foresee negative rates. RISK REWARD The lack of consensus is reflected in the wide range of strategies banks are devising to profit from the likely shifts in pricing over the coming months as the ECB lays out its policy.

ECB President Mario Draghi gave little away at his September news conference, prompting bets that would profit from a cut to be pared back, but Governing Council member Ardo Hansson subsequently brought the issue back to the fore, saying the bank should carefully consider the pros and cons of negative deposit rates. ING's Giansanti said a failure to cut in October would support those who think the ECB will never go below zero. Consequently, current rates of 8.5 basis points on forward contracts between October and December looked too low compared to Eonia fixings around 10 bps. Conversely, after the recent rise Commerzbank strategists see potential for Eonia rates to fall again and recommend a short-term tactical trade to receive the current interest rate of 5.75 basis points on the March 2013 forward contract"The re-pricing of the Eonia curve continued to an extent where we now see better chances in receiving Eonia forwards," said Commerzbank's Christoph Rieger. For Citi, the 1.36 percent rate on a three year Eonia contract with a start date one year from now is an attractive way to play out the uncertainty."This trade profits - of course - from a rate cut scenario as well in a situation of long-term unchanged rates, in which the market is desperate to grab the additional yield in forward space," the bank's strategists said in a note.