Kuwait-based Gulf Bank ratings lowered to 'BBB-/A-3' on deteriorating asset quality; outlook negative

"The rating action mainly reflects Gulf Bank's asset quality deterioration, which is exceeding our previous expectations and puts pressure on its financial performance,"

said Standard & Poor's credit analyst Nicolas Hardy.

The bank is exposed to some vulnerable sectors of the Kuwaiti economy, including real estate and investment companies, leading to increasing asset quality problems. This puts the bank in a weaker position than peers, notably as the impact on its overall business franchise is yet to be known.

"The ratings on Gulf Bank benefit from its good commercial position and importance to the Kuwaiti banking system. We classify Gulf Bank as a systemically important bank in the State of Kuwait (AA-/Stable/A-1+), which we consider as 'interventionist' toward its banking system," he added.

The long-term rating on Gulf Bank is therefore two notches higher than the bank's stand-alone credit profile. This reflects our expectation of the strong likelihood of the Kuwaiti government providing extraordinary and timely support if needed. This expectation was fully met in October 2008, when the authorities provided strong funding support to Gulf Bank. In addition, Kuwait Investment Authority (KIA; not rated) bought the unsubscribed portion of the 2009 rights issue to hold a 16% stake in the bank.

"The negative outlook reflects our opinion that Gulf Bank may continue to suffer from the deteriorated operating environment," said Mr. Hardy.

"We could lower the ratings if the effects of the real estate market correction and local investment companies' troubles further weaken the bank's overall financial profile, or if the bank's liquidity weakens significantly. Although unlikely in the near-term, we could consider a positive rating action if, all other things being equal, Gulf Bank's asset quality metrics improve, and its commercial position shows resiliency," he added.