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Rating Action:

Moody's upgrades Kuwait's Gulf Bank deposit rating to A3; outlook stable

26 Nov 2015

Limassol, November 26, 2015 -- Moody's Investors Service, ("Moody's") has today upgraded Kuwait's Gulf Bank K.S.C.P long-term deposit ratings to A3 from Baa1 and the standalone baseline credit assessment (BCA) to ba1 from ba2. The bank's short-term deposit ratings were affirmed at Prime-2. Moody's has revised the outlook on long-term ratings to stable from positive.

Today's rating action is driven by: (1) continuing improvements in asset quality and provisioning coverage; (2) the strengthening of the bank's risk management practices and a further reduction of balance sheet risk, which Moody's expects will contain the risk of a resurgence in NPL formation; and (3) the rating agency's expectation that core profitability will remain resilient and capitalisation buffers will remain adequate driven by a conservative implementation of Basel III capital requirements by Kuwait's central bank.

The list of ratings affected by today's rating action is at the end of this press release.

RATINGS RATIONALE

-- IMPROVED ASSET QUALITY AND PROVISIONING COVERAGE

The main driver for Gulf Bank's upgrade is the considerable improvement in the bank's asset quality and provisioning coverage metrics, which Moody's expects will improve further in the coming quarters. Gulf Bank has made significant headway in cleaning its balance sheet following large losses arising from transactions in derivative instruments in 2008 and the bank's lending exposure to problematic sectors. At year-end 2014, Gulf Bank's ratio of non-performing loans (NPLs) to gross loans declined to 3.3% from 6.7% at year-end 2013, while total NPL provisioning coverage (including significant general precautionary provisions) increased to 189% from 95% over the same period.

Moody's expects asset quality to improve further and the bank's NPL ratio to reach 2% by 2016 and be in line with other rated Kuwaiti institutions. The rating agency anticipates a supportive environment thanks to continued government spending on the back of ample accumulated resources to offset the negative pressure arising from lower hydrocarbon revenues. The rating agency expects the government to accelerate implementation of its new five-year development plan, while domestic consumption will remain strong supporting domestic credit conditions.

-- STRENGTHENED RISK MANAGEMENT PRACTICES AND REDUCTION IN PORTFOLIO RISK

Also driving today's action, the rating agency expects new NPL formation to remain at low levels due to: (1) improvements in the bank's risk management practices, which now compare favourably to peers, and tightened underwriting standards; (2) continued reduction in credit concentrations and exposure to high-risk segments.

Gulf Bank's credit exposures to real estate and investment companies and personal loans for the purchase of securities -- the sectors that generated the bulk of problem loans for the system in 2008-09 -- declined to around 31% of total credit at year-end 2014 from 47% at year-end 2009, broadly in line with the banking system average. At the same time, lower-risk retail loans have been growing by a compound average growth rate of 11% since end-2009 -- reaching 28% of total loans. Gulf Bank's 20 largest exposures (on and off-balance sheet) also continued to decline, to around 240% of its Tier 1 capital at end-2014 from 265% at end-2013, although these remain higher than the system average.

-- RESILIENT CORE PROFITABILITY AND ADEQUATE CAPITAL BUFFERS

Further supporting today's action, Gulf Bank's core profitability has proved resilient and remains the first line of defence against unforeseen losses, with a pre-provision income-to-average assets ratio of 2.1% for the first nine months of 2015, similar to the system average and at a level that has remained remarkably stable over the past five years -- with a coefficient of variation of just 8% during that time. Pre-provision profitability is supported by high efficiency, with a cost-to-income ratio of 34% for the same period, and a net interest margin of 2.3%. Although loan loss provision expenses continued to consume roughly two-thirds of pre-provision income during the nine months to September 2015, Moody's expects Gulf Bank's return on average assets to rise over 1% in 2016 for the first time in eight years.

Gulf Bank's capital buffers are also expected to remain adequate, with a Basel III common equity Tier 1 (CET1) ratio of 14.3% at year-end 2014. Gulf Bank already meets the Central Bank of Kuwait's conservative Basel III implementation under which the bank should hold a minimum CET1 of 10.5%, total Tier 1 of 12% and total capital of 14% to risk-weighted assets by end-2016 (inclusive of a 2.5% capital conservation buffer and a 1% domestic systemically important bank buffer specific to Gulf Bank).

-- GOVERNMENT SUPPORT

Moody's continues to believe there is a very high likelihood of government support for Gulf Bank's rated deposits in case of need. This reflects the Kuwaiti government's (Aa2 stable) track record in supporting all banks encountering difficulties, including Gulf Bank in 2009. It also reflects Gulf Bank's systemic importance as the fourth largest bank in Kuwait in terms of assets. We thus incorporate four notches of government support into the bank's deposit ratings, rating them at A3.

WHAT COULD MOVE THE RATING UP/DOWN

Given today's upgrade and the stable outlook on Gulf Bank's ratings, we expect limited pressure (positive or negative) on the bank's credit profile in the short term. Over time, however, upward rating pressure could develop if the bank achieves a significant reduction in balance sheet concentrations, a further improvement in capital buffers (above the system average), as well as maintaining strong asset quality. 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.

LIST OF AFFECTED RATINGS

Gulf Bank K.S.C.P

- Long-term deposit rating: Upgraded to A3, stable outlook

- Short-term deposit rating : Affirmed as Prime-2

- Baseline credit assessment (BCA) and adjusted BCA: Upgraded to ba1

- Counterparty Risk Assessment: Revised up to A2(cr) / Prime-1(cr)

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Kuwait City, Kuwait, Gulf Bank had total assets of KWD5.4 billion (US$18 billion) as of end-September 2015, according to reviewed IFRS financials.

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

Sean Marion
Managing Director
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 Kuwait's Gulf Bank deposit rating to A3; outlook stable
No Related Data.
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