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Moody's Investors Service: Significant challenges still facing Gulf Bank

Global Arab Network - - Rabih Serrai

Tuesday, 02 February 2010 12:10

Moody's Investors Service today downgraded the bank financial strength rating (BFSR) of Gulf Bank (Kuwait) to D- from D+. In line with this, Gulf Bank's long-term global local currency (GLC) and foreign currency deposit ratings were also downgraded to Baa2 from A3. All the ratings now carry a stable outlook. The rating actions conclude the review for possible downgrade initiated on 26 August 2009.

Moody's rating actions reflect the significant challenges still facing Gulf Bank, despite its progress in overcoming the large losses arising from its transactions in complex derivative instruments in 2008 and its subsequent recapitalisation in January 2009. These challenges predominantly relate to the risks associated with the structure of its balance sheet. In particular, Gulf Bank has high single-party exposures and high exposure concentrations to sectors such as real estate and construction, as well as to Kuwaiti non-bank financial institutions that, over the past 18 months, have performed poorly.

Although credit concentrations are common among Kuwaiti banks, the extent of such concentrations and exposures at Gulf Bank point towards legacy gaps in its risk management and credit-vetting practices, though the bank has been in the process of overhauling its risk management since early 2009.

The sharp rise in credit charges, viewed in the context of the Central Bank of Kuwait's progressive minimum provisioning requirement, point towards a continued deterioration in asset quality, while credit conditions in Kuwait remained weak during Q4 2009. Moody's understands that the impaired credits include some of the bank's largest customers and relate to both domestic and regional high-profile corporate defaults. Moody's expects elevated provisioning charges to continue to adversely affect Gulf Bank's performance throughout 2010.

The bank also has large depositor concentrations. Although the fact that the large depositors are cash-rich government-owned corporates affords some comfort, the extent of the funding concentration reflects that, similar to some of its domestic peers, its franchise is weaker than the size of its balance sheet would suggest. That said, the increasing reliance of most Kuwaiti banks on state funding illustrates the availability of government deposits intended to support system liquidity.

On the positive side, the participation of the Kuwait Investment Authority - the emirate's sovereign wealth fund - in Gulf Bank's capital since January 2009 is evidence of the very high probability of systemic support available to the bank. Moody's also views positively the overhaul of the bank's supervisory board in March 2009 and the recruitment of a seasoned chief general manager and chief executive officer in August 2009. Other changes to the bank's management team include a new CFO, new head of risk and new head of remedial action.

The last rating action on Gulf Bank was on 26 August 2009, when Moody's downgraded its ratings to A3/Prime-2/D+ from A1/Prime-1/C- and placed the ratings on review for further possible downgrade.

The principal methodologies used in rating Gulf Bank are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Kuwait City, Kuwait, Gulf Bank had total assets of KWD4.7 billion (US$16.3 billion) at the end of September 2009.

Global Arab Network

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