Gulf Bank ratings actions

At the same time, CI has affirmed Gulf Bank's Long Term and Short Term Foreign Currency ratings of A+ / A1 respectively, with the Outlook for both ratings being maintained at Stable. Furthermore, CI has raised Gulf Bank's Support rating to 2 from 3 in response to the Kuwaiti government's demonstrated and ongoing support for the bank.

The ratings actions follow the bank's recent announcement that it has suffered a, much higher than first estimated, loss of KWD375m. The loss, which virtually eliminated the Bank's Tier 1 capital, was primarily caused by client-related trading in financial derivatives contracts, as yet unspecified proprietary trading in financial instruments and the need to take additional (again unspecified) provisions against its loan and investment portfolios. This announcement follows an
extensive audit of the bank's financial position as of end October 2008, as instructed by the Central Bank of Kuwait.
The downgrade in the bank's financial strength rating reflects CI's opinion of the seriousness of the financial crisis at Gulf Bank, which will undoubtedly have a negative impact on its market reputation, both domestically and internationally. Customer trust and confidence is likely to take time to rebuild and may constrain its access to medium and long-term sources of funding as well as inhibiting the growth of its important local retail and wholesale customer base. As such, this episode has clear adverse implications for the short and medium-term prospects of the bank's commercial franchise and its ability to defend, far less grow, its market share of commercial banking loans and deposits in an increasingly competitive and challenging operating environment in Kuwait. In addition, the bank faces a potential loss of revenue going forward as its scales back trading and investment activity, which in the past had made material contributions to profits.

In its 18 November 2008 statement Gulf Bank's Board of Directors has indicated that the bank will issue KWD375m of new shares in order to replenish its depleted capital base. It is important to note that Gulf Bank's Board of Directors has stated that the government-owned sovereign wealth fund, the Kuwait Investment Authority (KIA), will cover any shortfall in subscription to the proposed share issue,
which will initially be offered to existing shareholders.