S&P revises Gulf Bankâ€™s outlook to positive
S&P Global Ratings has revised its outlook on Kuwait-based Gulf Bank to positive from stable; its 'A-/A-2' long- and short-term counterparty credit ratings have also been affirmed.
Gulf Bank has improved its capitalisation and reduced the risk on its loan book over the past three years, the rating agency said. “We therefore now believe the bank can maintain a risk-adjusted capital (RAC) ratio above 10 per cent, assuming a normalising cost of risk, a marginal improvement in margins, and growth of more than five per cent in lending over the next two years,” S&P said.
In addition, Gulf Bank has continued with initiatives to improve its risk profile. The granularity of the loan book has increased alongside the share of retail loans, thereby reducing single-party exposure, and the bank's industry concentration is now on par with peers'.
S&P said that the bank has made visible progress in resolving its large legacy problems as shown by recoveries on old problem loans in 2016. However, its risk management and strategy remain untested in the current low oil price environment. “We believe a longer track record on credit losses and asset quality that compares with that of the region's best banks will show whether Gulf Bank has achieved a sustainable improvement in its risk position,” S&P said.
“We affirmed our ratings because of Gulf Bank's business position and stability, derived from its status as the fourth-largest commercial bank in Kuwait,” said S&P. “Gulf Bank has market shares in loans and deposits of close to 10 per cent and is improving its revenue mix. In our view, the bank has delivered on its commitment to turn around its business model since the global turmoil in 2009.”
In 2016, retail loans accounted for 35 per cent of Gulf Bank's loan book versus less than 25 per cent in 2011, according to S&P data. The share of fee income has also been increasing (18.6 per cent in 2016 compared with 15.9 per cent in 2012), thanks to higher volumes of ancillary business – notably bid bonds and performance bonds – related to infrastructure investment activity.
“We anticipate the bank's core earnings will increase to about one per cent of adjusted assets by the end of 2018, although staying below that of peers,” S&P said. “In our view, Gulf Bank's funding and liquidity profile will remain resilient to the low oil-price environment and support our ratings. The bank's broad liquid assets sufficiently cover short-term wholesale funding needs (by 1.44x on average over the past five years), and comprise mainly cash, bank placements, and a portfolio of high-quality Kuwaiti government securities. We note that the impact of sovereign securities on domestic liquidity has been lower than elsewhere in the region, and the collection of private-sector and government deposits remains adequate.
“The ratings continue to reflect our view of Gulf Bank's high systemic importance in Kuwait and the Kuwaiti authorities' highly supportive stance toward the banking sector. As a result, the long-term rating on Gulf Bank benefits from three notches of uplift, reflecting our view of a high likelihood of extraordinary government support for the bank if needed.
“The positive outlook reflects a one-in-three likelihood that Gulf Bank will maintain the positive momentum in capital and risk over the next 24 months. We will raise our ratings on the bank if our RAC ratio sustainably exceeds 10%, most likely through improved capital generation and moderate dividends. Although less likely, due to the tense regional geopolitical environment, ongoing price correction in real estate markets, and low oil prices, we could also raise the ratings if the bank's asset quality continues to strengthen and credit losses reduce toward those of regional and domestic peers.
“Furthermore, we would need to see decreasing tail risks stemming from high albeit declining single-party concentrations and commercial real estate loans. We could revise the outlook to stable if we believed the RAC ratio would remain below the 10% range, if profitability were weaker than expected, or if asset quality failed to improve.”