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Rating Action:

Moody's upgrades Gulf Bank's deposit rating to Baa1; positive outlook

03 Jun 2014

Limassol, June 03, 2014 -- Moody's Investors Service has today upgraded Gulf Bank K.S.C.'s long-term deposit ratings to Baa1 from Baa2 and the standalone bank financial strength rating (BFSR) to D, equivalent to a baseline credit assessment (BCA) of ba2, from D-/ba3. The bank's short-term ratings were affirmed at Prime-2. The outlook on all long-term ratings and the BFSR remains positive.

Today's rating action is driven by (1) a significant improvement in asset quality and provisioning coverage; (2) the replenishment of the bank's capital buffers to levels reported prior to the 2008-09 global financial crisis; (3) the strengthening of the bank's risk management practices and a reduction of balance sheet risk; and (4) the resilience of the bank's pre-provision profitability.

RATINGS RATIONALE

-- IMPROVED ASSET QUALITY AND PROVISIONING COVERAGE

The main driver of the upgrade is the considerable improvement in Gulf Bank's asset quality and provisioning coverage metrics. Gulf Bank has made significant headway in cleaning its balance sheet following large losses arising from transactions in complex derivative instruments in 2008 and concentrated lending to real estate and Kuwait investment companies that performed poorly during the crisis. At year-end 2013, Gulf Bank's ratio of non-performing loans (NPLs) to gross loans declined to 6.7%, from over 30% at year-end 2009, while total NPL provisioning coverage increased to 95% at year-end 2013.

-- REPLENISHED CAPITAL BUFFERS

Gulf Bank has also replenished its capital buffers to pre-crisis levels, with the Tier 1 ratio rising to 15.1% at year-end 2013, up from 12.5% in early 2009 (immediately after the bank's recapitalisation through a rights issue in January 2009), which is close to the 16.2% average for rated banks in Kuwait. At the same time, Moody's notes the diminishing risk to capital from unprovisioned NPLs and the reduction in large exposures. Gulf Bank's 20 largest loans declined to around 260% of its Tier 1 capital at end-2013, from 380% at end-2009.

-- REDUCTION IN PORTFOLIO RISK

Gulf Bank has also reduced its exposure to high-risk segments. Credit exposures to real estate and investment companies and personal loans for the purchase of securities declined to 36% of total credit at year-end 2013 from 47% at year-end 2009, and are now slightly lower than the banking system average. At the same time, lower-risk retail loans have been growing by a compound average growth rate of 9% since end-2009 -- reaching 25% of total loans -- despite an overall 5% decrease in the bank's portfolio. In addition, the bank has reduced its market and equity risk by no longer engaging in proprietary trading. The bank's securities holdings now mainly consist of bonds issued by the Kuwaiti sovereign (Aa2 stable) and the central bank, while only around KWD120 million of outstanding non-hedging derivatives (mainly credit defaults swaps written by the bank prior to 2008) remain versus over KWD1.2 billion in 2007.

-- RESILIENT PRE-PROVISION PROFITABILITY

Gulf Bank's core profitability has proved resilient, with a pre-provision income-to-average assets ratio of 2.2% for 2013, similar to the system average and relatively stable over the past three years. Pre-provision profitability is supported by high efficiency, with a cost-to-income ratio of 35% for 2013, and a net interest margin of 2.4%. Moody's expects Gulf Bank's solid pre-provision profitability to remain the first line of defence against unforeseen losses.

-- POSITIVE RATING OUTLOOK

The positive outlook on Gulf Bank's ratings reflects Moody's expectation that asset quality will improve further and potentially converge with the system average by 2015. At the same time, Moody's expects provision expenses to start decreasing from 2015, leading to an improvement in net profitability, with return on average assets rising to over 1% from around 0.6% during 2011-13. This improvement will align the bank's bottom-line profitability to that of its domestic peers.

Moody's expects further improvements in Gulf Bank's asset quality metrics to be supported by (1) improvements in the bank's risk management practices that now compare favourably to peers; (2) tightened underwriting standards; (3) a benign operating environment in Kuwait; and (4) more stable credit growth. Moody's forecasts real non-oil GDP growth of 4.4.% in Kuwait during 2014, the highest rate since 2007, and 10% credit growth for Gulf Bank this year.

WHAT COULD MOVE THE RATING UP/DOWN

Upward pressure on Gulf Bank's ratings could develop if the volume of NPLs decrease further leading to lower provisioning needs and improved profitability, while at same time the bank maintains strong underwriting standards as it grows its loan book. Downward pressure on Gulf Bank's ratings could result from a resurgence in NPL formation (particularly amongst the bank's largest debtors), a weakening in capital buffers or a decline in earnings-generating capacity.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Kuwait City, Gulf Bank reported total consolidated assets of KWD5.3 billion ($19 billion) as at end-March 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alexios Philippides
Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Gulf Bank's deposit rating to Baa1; positive outlook
No Related Data.
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