A recent management revamp at Kuwait Finance House (Malaysia) Bhd (KFH Malaysia) spells the start of a renewed attempt by its Middle Eastern parent company to strengthen the struggling Islamic lender.

KFH Malaysia, which started operations in August 2005 as the country’s first foreign Islamic bank, slipped into the red again last year, posting a net loss of RM37.18 million after three straight years of profitability.

This was on the back of worsening asset quality, with gross impaired financing ratio (GIF) at 7.65% as at end-March 2016 compared with 7.42% three months earlier — much higher than the Islamic banking sector’s 1.2% as at end-December 2015.

The bank’s parent company, Kuwait Finance House KSC (KFHK), had in May last year contemplated selling its wholly-owned Malaysian subsidiary as part of a broader restructuring of its operations. It changed its mind later that year, after early talks on a potential sale to Qatar National Bank collapsed.

“During the latter part of 2015, a decision was taken by our parent company in Kuwait to retain the Malaysian franchise and to restructure the business with a new top management team. The focus was to rebuild the bank into a significant contributor to the group as well as leverage the global reach of the bank in Southeast Asia and beyond. Malaysia is a key market in this region, hence the decision to stay,” KFH Malaysia’s new CEO David Power tells The Edge in an email response to questions.

He says new appointments were made to strengthen the capabilities of the bank and “to drive change and forward momentum”.

Power took over the reins on Aug 29 from Ahmed S Al Kharji, who remains on the bank’s board of directors. Prior to this, Power, a South African, was KFHK’s group chief retail and private banking officer. Based in Kuwait, he had overseen the retail and private banking franchise in Malaysia, Turkey and Bahrain.

Apart from Power, KFH Malaysia had also, a few months earlier, appointed Nor Azzam Abdul Jalil as its deputy CEO and chief of consumer banking and David Wee Kim Peng as its chief operating officer. Nor Azzam was formerly with CIMB Bank Bhd while Wee was with AmMetLife Insurance Bhd.

Power says the KFH Malaysia team is now in the midst reviewing the strategic direction of the bank and should be able to come up with a plan in two months.

“What is key is to stabilise the bank and focus on getting the basics right. We are diligently reviewing the strategic direction of the bank and should be in a position to finalise the future direction over the next two months. A clear part of this review is the transformation of the bank, which will bring us more in line with [KFHK’s] global strategy, clearly keeping the local flavour very much in mind,” he says.

“We are confident of our ability to drive change and bring new products and services to the Malaysian market by leveraging our group strength, which has been underutilised in the past. We [KFHK] are, after all, the second largest Islamic bank globally and we want to offer our clients in Malaysia a local experience with a global reach.” 

Power says KFH Malaysia will look to grow its three business segments — treasury and capital markets, corporate and institutional banking, and commercial banking — according to the bank’s new strategy. He gives no hint of what the new strategy may entail.

KFH Malaysia’s retail business — it is one of the few Middle East banks here that does retail banking — will remain an integral part of the bank for the foreseeable future, he says. “We are cognisant of the challenges of running a retail business in Malaysia but are confident of the niche we wish to play in.”

One of 16 Islamic banks in the country, KFH Malaysia had the disctinction of being the first Middle Eastern financial institution to set up operations here after Malaysia opened up its Islamic banking sector to foreign players.

However, like many of the other Middle Eastern lenders here such as Asian Finance Bank Bhd, it has floundered over the years, in part due to the tough competition from local rivals that have the benefit of much larger balance sheets and retail networks.

KFH Malaysia’s problems were compounded by a lack of strong leadership and lax risk management practices in the early years, critics say. In FY2009 ended Dec 31, it posted its first loss of RM30.88 million amid a sharp deterioration in asset quality. Its GIF shot up to 8.64% from just 0.32% in 2008.

The lender went on to post another two years of losses before returning to the black in FY2012 following changes in top management and a concerted effort to clean up its books.  Last year, it once again sank into a loss after making a net profit of RM92.83 million in FY2014. The loss was mainly because it had made an impairment charge on financing and advances to the tune of RM99.74 million, compared with a writeback of RM75.48 million in FY2014.

About 66% of its RM7.42 billion total financing in FY2015 was to corporates and SMEs. That year, its corporate and institutional as well as commercial banking business segments made losses.

In 1QFY2016, KFH Malaysia reported a net profit of RM13.45 million, helped by an impairment writeback on financing of RM13.32 million.Its capital position is strong, with Common Equity Tier 1 ratio at 19.525%, much higher than the industry average.

It remains to be seen whether the worst is over for the group given the slowing economy. Sharidan Salleh, head of banking at rating agency Malaysian Rating Corp Bhd, notes that KFH Malaysia has taken remedial measures to address its asset quality issue and has adopted a more cautious lending approach, as evident by its lower financing growth compared with the Islamic banking industry in recent years.

“Any further weakening in economic conditions would weigh on its asset quality metrics, particularly given that it has a higher corporate financing exposure than retail. However, it currently has no exposure to the troubled oil and gas sector,” he tells The Edge.

All eyes are on Power and his team to see if they can deliver sustainable profitability for the group. 

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