Moody’s downgrades Gulf Bank Kuwait

Moody's Investors Service has downgraded the bank financial strength rating (BFSR) of Gulf Bank in Kuwait to D+ from C-. Consequently, the long-term global local currency (GLC) and long-term foreign currency deposit ratings were also downgraded to A3/Prime-2 from A1/Prime-1, respectively.
All ratings remain on review for further possible downgrade as the bank still faces challenges despite its progress in overcoming the distress caused by large losses arising from transactions in complex derivative instruments during the year.
On the positive side, following the successful conclusion of a rights issue in January to raise KWD 376 mln (circa the level of losses suffered from the bank's derivatives dealings as well as credit charges and securities impairment charges), the bank was able to reinstate capitalisation to levels where it no longer constitutes a constraint on the rating. Mood’s viewed as positive the participation of the Kuwaiti sovereign wealth fund (KIA) to January's capital increase, giving KIA a 16% stake in the bank. The overhaul in the composition of the supervisory board (a new highly respected Chairman Ali Al-Rashaid Al-Bader) in March, and the recruitment of a seasoned Chief General Manager and CEO (Michel Accad) in August were also viewed positively.
Although the bank had conducted its derivative dealings on a back-to-back basis last October (ostensibly hedging its position), it failed to identify the level of credit risk it assumed. Furthermore, the quality of the bank's loan book deteriorated significantly in 2008. In particular, the ratio of non-performing loans (NPLs) to gross loans shot up from under 2% in 2007 to over 12% at YE2008, with derivative-related credit risk accounting for around half of new NPLs. Moreover, Gulf Bank, with total assets of KWD 4.7 bln (US$ 16.3 bln) as at the end of June, exhibits high single-party and industry concentrations to sectors that experienced pressure over the past 12 months such as real estate and construction and the embattled investment company sector.
Gulf Bank's ratings remain under review for a possible downgrade reflecting the elevated credit charges that are maintaining pressure on bottom-line results as at 1H 2009, which are partly related to the default of some of its larger customers. June 2009 bank data suggest that NPLs increased significantly, and credit charges are likely to remain high in the foreseeable future.
Moody's cautions that upward pressure on NPLs in the system could also persist over the medium term given the time lag observed between weakening market conditions and observable evidence of rising delinquencies.