Global Arab Network - Capital Intelligence (CI)  announced that it has affirmed Gulf Bank’s Long and Short-term Foreign Currency ratings at bbb+ and a2, respectively, as well as its Financial Strength rating of bb+.

The Support level is maintained at 2, reflecting partial government ownership via the Kuwait Investment Authority and the strong support shown in the Bank’s 2009 recapitalisation exercise.  The Outlook for all ratings remains ‘Stable’.  For any upward revision to either ratings or outlook, provision coverage, and the ratio of unprovided non-performing loans (NPLs) to free capital, would need to be considerably strengthened – and in turn this would require either further additional capital or greatly improved operating earnings – neither of which seem likely in the short to medium term.

The Bank had to be recapitalised in January 2009 following a combination of losses incurred due to the inability of a client to shoulder losses on a derivatives contract, together with large additional provisions taken to cope with a marked deterioration in asset quality.  Following this Gulf Bank (GB) returned to profit in 2010, despite again making large additions to loan-loss provisions – which it will need to continue to do as provision coverage of the very large NPL portfolio remains low – and this in CI’s opinion, significantly impairs capital. The return to profitability was maintained in Q1 2011 but at current levels restoring loss cover to what CI would see as an adequate level would be very protracted. That said, the Bank would appear to once again be growing its asset base and loan portfolio, and this growth should be reflected in growing profits at the operating level in future quarters.

GB still has a good domestic franchise and a strong position in retail banking.  With the continuing support of its shareholders, the Bank should be able to repair its balance sheet and restore earnings capacity. However while this is being done, its competitors may well be taking market share and a return to the solid number two position in the Kuwaiti market may be more difficult.