Fitch downgrades Gulf Bank's individual rating to 'F'; affirms long-term IDR at 'A+'

Fitch has simultaneously affirmed GB's Long-term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook, Short-term IDR at 'F1', Support rating at '1' and Support Rating Floor at 'A+'.

The downgrade of GB's Individual rating reflects Fitch's view that the bank would have defaulted if it had not received external support. A serious lapse in GB's risk management has resulted in potentially large losses arising from the bank's derivative transactions. In addition to certain measures already taken by the Kuwaiti authorities, Fitch believes that GB requires additional capital from existing shareholders and/or external sources to cover these losses and maintain capitalisation at adequate levels.

GB announced on 26 October 2008 that derivative losses occurred due to the impact of the significant recent decline of the EUR against the USD on certain customer-driven derivative transactions. These transactions exposed the bank to considerable counterparty risk and the resulting losses are likely to have a negative impact on GB's franchise, funding and prospects. Fitch will closely monitor further disclosure on the extent of the losses, the structure of the transactions that caused the losses and the measures taken to strengthen capitalisation and internal controls.

GB's IDRs and Support rating reflect Fitch's view that there is an extremely high probability that GB will receive further financial support from the authorities in the state of Kuwait (rated 'AA'/Stable), if necessary. On 29 October 2008, the Kuwaiti Minister of Finance announced with respect to GB that the government "is ready to contribute to increasing the bank's capital" in order to "support the financial position of the bank".

Fitch notes the strong statements of support from the Kuwaiti authorities for GB. On 26 October 2008, the Kuwaiti authorities announced a guarantee for all deposits at local banks. The agency believes the Kuwaiti authorities have a strong propensity and capacity to maintain confidence in a relatively small banking system, within which GB held a significant market share of around 13.5% of domestic banking system assets at end-H108. The Kuwaiti authorities have supported the entire local banking system through two major systemic crises; the Souk Al-Manakh (informal stock market) collapse in 1982 and the Iraqi invasion in 1990.

There is currently limited downside risk to the Long-term IDR as it is at the Support Rating Floor. Fitch will continue to closely monitor any measures taken by the Kuwaiti authorities to support GB.

GB is the second-largest commercial bank in Kuwait. The bank's core businesses are domestic retail and commercial banking and project-related international lending. The three largest shareholders owned approximately 64% of the bank at end-2007.