Moody's reviews Gulf Bank's Aa3/C ratings for downgrade (Kuwait)

As a result, the bank's Aa3 long-term local and foreign currency deposit ratings were also placed on review for possible downgrade. The Prime-1 short-term ratings are not affected.

Moody's rating action follows Gulf Bank's announcement on 26 October that it has incurred potentially sizeable losses from trading foreign exchange derivative instruments on behalf of its customers. According to the bank, it maintained a hedged trading position as these transactions were conducted on a back-to-back basis but assumed substantial counterparty risk.

The losses have arisen as a result of the failure of some customers to honour their obligations towards the transactions. The bank has yet to disclose details on the nature of these transactions but Moody's understands that they involved complex instruments. According to the rating agency, this therefore raises questions as to whether the underlying risks assumed by customers, and by extension by the bank, were properly identified and managed.

The bank's announcement of the unexpected losses resulted in a run on customer deposits, which prompted the Kuwaiti authorities to guarantee deposits not only in Gulf Bank but in all of the country's banks. Although preliminary information indicates that the run was modest in absolute figures, Moody's notes that it represented a flight of retail customer funds that could have a longer-term impact on the bank's business franchise. Gulf Bank is one of the largest retail banks in Kuwait behind Kuwait Finance House and National Bank of Kuwait.

In reviewing the bank's ratings, Moody's will be assessing not only the exact magnitude of the potential losses, the implications for the bank's franchise, issues related to controls and risk management and potential associated failures but also the extent of the impact of the losses on the bank's capital and recapitalisation plans.

Headquartered in Kuwait City, Gulf Bank reported total assets of KD5.19bn ($19.2bn) as of September 2008.