Gulf Bank gets poor S&P ratings

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S&Ps ratings services on Tuesday lowered its long- and short-term counterparty credit ratings of Kuwait-based Gulf Bank to BBB-/A-3 from BBB+/A-2 with a negative outlook.

The tough operating environment in Kuwait is putting the domestic property and stock market under pressure, in turn weakening both the credit profiles of local investment and real estate companies and the asset quality and profitability of Gulf Bank.

The negative outlook reflects the ongoing pressure on the bank, said a company statement.

"We believe Kuwait-based Gulf Banks stand-alone credit profile to be impaired by weak asset quality metrics. We are lowering our long- and short-term ratings on Gulf Bank to BBB-/A-3 from BBB+/A-2," said Standard & Poors credit analyst Nicolas Hardy.

"The rating action mainly reflects Gulf Banks asset quality deterioration, which is exceeding our previous expectations and puts pressure on its financial performance," he added.

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.

The long-term rating on Gulf Bank is therefore two notches higher than the banks 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) bought the unsubscribed portion of the 2009 rights issue to hold a 16 per cent stake in the bank.

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

"We could lower the ratings if the effects of the real estate market correction and local investment companies troubles further weaken the banks overall financial profile, or if the banks liquidity weakens significantly."

"Although unlikely in the near-term, we could consider a positive rating action if, all other things being equal, Gulf Banks asset quality metrics improve, and its commercial position shows resiliency," he added.