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Rating Action:

Moody's downgrades United Gulf Bank's ratings (Bahrain)

Global Credit Research - 26 Oct 2010

Limassol, October 26, 2010 -- Moody's Investors Service has today downgraded the foreign currency deposit ratings of United Gulf Bank B.S.C. (UGB) by one notch to Ba1/Not-Prime from Baa3/Prime-2 and its bank financial strength rating (BFSR) by two notches to D- from D+. The senior unsecured and subordinated debt ratings of the bank were also downgraded to Ba1 and Ba2, respectively. The deposit and debt ratings have negative outlooks, whereas the D- BFSR has a stable outlook. Today's rating action concludes the review of the bank's ratings that Moody's initiated on 14 June 2010.

RATINGS RATIONALE

Moody's decision to downgrade UGB's BFSR, representing the bank's standalone financial strength, to D-, was driven by the more difficult operating environment for investment banks in the GCC and by the gradual weakening of the bank's financial flexibility. Moody's said that, although the bank has navigated the market downturn over the past two years without undue stress, UGB remains exposed to an environment that features greater asset price volatility and more challenging wholesale funding conditions. These conditions amplify the risks associated with UGB's franchise and risk positioning constraints, including:

(i) the bank's modest earning quality, whereby recurring revenues provide only moderate coverage of operating expenses and interest income;

(ii) its modest capital levels given very high investment concentrations in relatively illiquid assets;

(iii) its high funding concentration and dependence on wholesale sources of funds, which exposes the bank to refinancing risk.

Moody's adds that its assessment of UGB's standalone financial strength continues to incorporate the ongoing benefits of belonging to Kuwait Investments Project Company (KIPCO), as manifested in the form of business origination, fee income flows and access to funding.

Moody's explains that, in assessing UGB's earnings quality, it has examined the bank's potential for fee and commission income and dividends from associates within the context of the more difficult business climate. The rating agency found that this type of income provides only modest coverage of operating and interest expenses, let alone coverage for possible investment losses that could occur during negative market cycles. Moody's further notes that, in 2009, the bank would have generated net losses had it not been for non-recurring gains from the sale of commercial banking subsidiaries to Burgan Bank, a KIPCO group company.

With respect to capitalization, Moody's notes that, although the bank reported comfortable regulatory total capital and Tier I ratios of 17.9% and 15.2% respectively at the end of June 2010, UGB nonetheless maintained a ratio of illiquid investments (unlisted securities and illiquid investments in associates) to tangible common equity of more than 3x. Given the bank's high investment concentrations, Moody's considers leverage of this level to be more appropriately reflected by a D- BFSR, in line with rated regional peers.

Moody's adds that, as a wholesale-funded institution, UGB is exposed to a more challenging funding environment, partly mitigated by access to deposits from its parent, KIPCO. At the end of June 2010, UGB received roughly half of its funding from KIPCO and other group companies. Although this represents a very high funding concentration, Moody's also considers this to be a relatively stable source of funding.

Finally, Moody's explains that the downgrade of UGB's deposit ratings to Ba1/Not-Prime is driven by the downgrade of the BFSR to D-, which is equivalent to a baseline credit assessment (BCA) of Ba3. The bank's Ba1 deposit rating incorporates two notches of uplift as a result of imputed parental support. This parental support factors Moody's assumptions about a moderate-to-high probability of support from KIPCO as well as KIPCO's own issuer rating of Baa2.

The negative outlook on the long-term deposit and debt ratings is driven by the negative outlook on KIPCO's rating.

The last rating action on UGB was implemented on 14 June 2010 when Moody's placed the bank's ratings on review for possible downgrade.

The principal methodologies used in rating United Gulf Bank B.S.C. were Bank Financial Strength Ratings: Global Methodology published in February 2007, Global Securities Industry Methodology published in December 2006, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Manama, Bahrain, UGB reported total balance sheet assets of US$1.819 billion at the end of June 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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Limassol
George Chrysaphinis
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus

Moody's downgrades United Gulf Bank's ratings (Bahrain)
No Related Data.
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