Capital Intelligence (CI), the international credit rating agency, announced that it had affirmed the ratings of Gulf Bank (GB) Long-Term and Short-Term Foreign Currency Ratings (FCR) at 'bbb+' and 'a2', respectively, as well as the Financial Strength Rating (FSR) of 'bb+'.
The Support level is maintained at 2, underpinned by the blanket government guarantee for bank deposits and the already demonstrated governmental willingness to provide GB with equity support. The Outlook for all ratings is 'Stable', as the substantial improvement in constraining factors needed for a ratings change appears unlikely to occur before the next review.
While steady progress has been made in addressing asset quality issues, non-performing loans (NPLs) nonetheless remain high, while loan loss reserve coverage remains low. This and the consequent high ratio of unprovided NPLs to free capital are the major constraining factors on the FSR. An upward move in the FSR would require both considerably improved asset quality as well as an improvement in profitability at the net level.
GB returned to profit in 2010, and increased that profit in 2011. However, returns at the net level remain low, something that is unlikely to change as it will take time until loan loss reserve coverage reaches a satisfactory level. At current levels of operating profit and, unless loan recoveries accelerate, it is expected that another two years of provisioning will be required to restore loan loss reserve coverage to what CI considers an adequate level. Slow loan demand in a dull domestic economy is not helping.
GB is fortunate in having supportive shareholders, including the Kuwaiti government via the shareholding held by the KIA, following the January 2009 recapitalisation. Additional capital would ideally be injected at this stage to allow a faster rebuild of loan loss reserves; this, however, does not appear to be likely.
Gulf Bank was established in 1960 and commenced operations in 1961. Following a substantial net loss in 2008, the Bank was recapitalised in January 2009 through a KD376m rights issue. This, in turn, significantly altered the shareholding structure. Having taken up the unsubscribed portion of this rights issue, Kuwait Investment Authority (KIA-Kuwait's sovereign wealth fund) became one of Gulf Bank's largest shareholders, with a shareholding of approx. 16%. GB remains the second largest of the five Kuwaiti commercial banks. It operates one of the larger domestic networks in Kuwait, comprising 56 branches together with well over 200 ATMs, supporting its reputation as a bank with a particularly strong retail offering.
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