Moody's maintains Gulf Bank rating review following losses announcement

This follows the announcement on 18 November by the Central Bank of Kuwait that the bank's losses would amount to $1.4bn -- much higher than previously indicated.

Moody's understands that these losses represent around 75% of the bank's capital funds (95% of Q3 2008 core capital) and, according to a Gulf Bank statement issued on 19 November 2008, relate to dealings in derivatives both on behalf of its customers and on its own account as well as other provisions. At the same time, the bank announced that it will proceed with a new share issue, raising capital equivalent to the full amount of the recorded losses. The new shares will be offered to existing shareholders on a pro-rata basis with the Kuwait Investment Authority taking up any shortfall. The entire supervisory board of the bank has submitted its resignation effective upon the completion of the new shares issue.

"The newly announced losses exceed previously indicated levels, and have eroded Gulf Bank's capital below regulatory minimums. Recapitalisation of the bank is projected to re-instate the bank's capital adequacy to September 2008 levels, while any delays in the new capital issue may bring into question both the shareholders' and the authorities' commitment to the bank and hinder its normal operations," explains Stathis Kyriakides, lead analyst at Moody's for Gulf Bank.

Although the extent of the announced losses exerts pressure on the bank's ratings, these are maintained on review until such time as the circumstances surrounding recent events are clarified. The conclusion of the rating review and the extent of any possible downgrades will, among other factors, depend on: (i) the promptness and success of the recapitalisation; (ii) evidence of any additional as-yet-undisclosed risky exposures; (iii) the likely impact on the bank's franchise; (iv) the form and nature of the transactions that brought about the aforementioned losses and what this signifies in terms of the bank's controls and risk management processes and capabilities; and (v) the manner in which corporate governance deficiencies are addressed.

Moody's will consider these factors in light of the sustainability of the bank's core business, which was performing well prior to the emergence of the recent problems. The impact of recent developments notwithstanding, Gulf Bank is the third largest bank in Kuwait with a retail franchise and in previous years had consistently generated strong levels of profitability, driven by good net interest margins, good cost controls, as well as high fee-generating capacity (although it is unclear how much of this relates to its high-risk derivative operations).

The previous rating action on Gulf Bank was on 10 November 2008, when Moody's downgraded the BFSR to C- from C and the long-term deposit ratings to A1 from Aa3, and placed the ratings on review for possible further downgrade.

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