Fitch affirms Gulf Bank at 'A'; Outlook Stable

The IDRs and Support Rating reflect the extremely high probability of support from the Kuwaiti authorities, if needed. Fitch's opinion of likely support is based on the long history of support for banks in Kuwait and the bank's strong domestic franchise. Its Individual Rating reflects GB's consistently strong profitability, healthy asset quality and satisfactory capitalisation. It also takes into account the potential for asset quality deterioration after GB's recent rapid loan growth, its reliance on a small and undiversified economy and concentrations in the bank's loan and funding profile.

Its profitability recently suffered slightly from new rules introduced by the Central Bank of Kuwait to try to clamp down on retail lending. However, given its fairly rapid growth in corporate lending and fee income, the bank was still able to report an operating return on average equity (ROAE) of more than 30% in 2007. Growth in H108 slowed, with lending up by just 2% which, coupled with a decrease in investment income and an increase in impairment charges, meant that operating ROAE declined to 25%. Its net interest margin fell in 2007 as interest income declined and funding costs rose, although it remained flat in H108.

GB's asset quality ratios remained good, although the bank continues to have a significant exposure to retail estate lending (21% of the portfolio), but it is below the sector average. Increased regulatory risk weightings for retail and real estate exposures resulted in a decline in its Tier 1 and total capital ratios in H108 to 11.4% and 15.1%, respectively (2007: 14.4% and 19%).

GB is the second-largest commercial bank in Kuwait, with a market share of around 15% of domestic system assets. The bank's core businesses are domestic retail and commercial banking and project-related international lending, although expansion is planned in investment services and treasury activities. The three largest shareholders owned approximately 64% of the bank at end-2007.