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Fitch affirms Gulf Bank at 'A+'; outlook stable

28June 2011
JEDDAH: Fitch Ratings has affirmed Gulf Bank 's ( GB ) 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 Individual Rating is affirmed at 'D/E'.

The affirmation of the Long- and Short-term IDRs, Support Rating Floor and Support Rating reflect Fitch's assessment that there is an extremely high probability that state support would be provided to GB if needed.

Support provided by the Kuwaiti authorities has traditionally gone beyond that provided by other governments in the region.

The bank's Individual Rating reflects the improvements made by the bank's new management since 2009, which include progress in strengthening the balance sheet and a greater focus on the bank's core business.

It also reflects asset quality problems, which will require time to work through, although Fitch's expectation is that improvements in both profitability and asset quality will continue. In Fitch's opinion, capitalization seems somewhat tight given the reducing, but still sizeable volume of unreserved impaired assets to the bank's reported equity.

Despite the still difficult operating environment in Kuwait, core revenue, consisting of net interest and fee income, improved in 2010 and slightly in Q111.

However, profitability remains constrained by high impairment charges, which absorbed most of the bank's pre-impairment operating profit. Impairment charges are likely to remain high in 2011 as the bank builds up reserves to a more comfortable level.

The loan book contracted in 2010, mainly due to write-offs of impaired loans, although, loan growth was sluggish across the Kuwaiti banking sector. Impaired loans dropped sharply in 2010, mostly because of the write-offs.

The main concentrations in impaired lending were in real estate and loans to domestic investment companies; both sectors that are problematic for most Kuwaiti banks. Despite the write-offs, the impaired loan ratio was still high at 16.7 percent at end-Q111 (19 percent at end-2010).

Reserve coverage of 33 percent at end-2010 is low by domestic and regional standards, even though impaired loans are fairly well collateralized; including collateral, coverage levels reached 97 percent at end-2010. Collateral consists largely of shares traded on the Kuwaiti stock exchange and mainly domestic real estate.

GB is the third-largest Kuwaiti bank by assets, accounting for around 11 percent of the system total at end-2010.

GB is active in retail and corporate banking, trade finance and treasury services.

Following an emergency recapitalization in early 2009 after substantial losses related to derivative transactions, the Kuwait Investment Authority (KIA) became the bank's second-largest shareholder, with a 16.1 percent stake.

© Arab News 2011