Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Bahrain-based United Gulf Bank’s (UGB)’s Long and Short-Term Foreign Currency Ratings at ‘BBB’ and ‘A3’, respectively, reflecting its strong ownership and the demonstrated support from the KIPCO Group. The Bank’s Support Level of ‘3’ underscores the high likelihood of support from KIPCO.
UGB’s Financial Strength Rating (FSR) is maintained at ‘BBB’, supported by its sound capital adequacy, diversified sources of funding and ample liquidity, low level of impaired assets and the rebound in net profit in Q1 2012. The FSR is constrained by the Bank’s dependence on market funding, asset and income concentrations, earnings volatility and ongoing high level of related party transactions. While the Outlook for the ratings remains ‘Stable’, UGB’s ratings would more than likely come under downward pressure in the event profitability did not sustain the current trend throughout the remainder of 2012.
UGB is a member of the diversified and well respected KIPCO Group in Kuwait. Having successfully completed the sale and transfer of four MENA regional commercial banks to Kuwait-based Burgan Bank (BB) in 2010, also majority owned by KIPCO, UGB concurrently acquired a strategic stake in BB. While UGB’s strategic equity investment in BB has culminated in concentration risks, it should be noted that BB is a well regarded and systemically important institution in Kuwait. BB’s shares are listed on the Kuwait Stock Exchange and thus constitute an important source of potential liquidity for the Bank.
Sources of funding remained adequately diversified and supported by ample medium-term finance. Although there remains some reliance on short-term interbank deposits (mainly from other KIPCO group entities which channel liquidity on an arm’s length basis) this source of funds has proven stable in the current operating environment. The Bank successfully raised new bank term borrowings in 2011 as well as repaid term debt. Liquidity has been boosted in the current quarter through asset sales in view of an USD200mn loan repayment in June 2012. Capital adequacy is sound and provides an adequate buffer against eventualities.
The difficult global and regional financial markets in recent years have forced UGB to step up provisioning for impaired assets and this has impacted net profitability. Although the provision charge declined slightly in 2011, a marked fall in operating profit resulted in small net loss. Interim results for Q1 2012 indicate net profit recovered on the back of a higher share of results from associates and an increase in fee and commission income. While the regional operating environment remains challenging, UGB is now better placed to focus on its core businesses, primarily asset management (through KAMCO) and investment banking. Although these areas of activity had performed exceptionally well in the years prior to 2008 (before the onset of the global financial crisis), they face ongoing difficult market conditions.
UGB was established in 1980 in Manama, Bahrain and in 1988 it became a subsidiary of KIPCO, which currently owns 95.83% of UGB’s shares. As a wholesale licensed bank, the Bank provides asset management, treasury, corporate finance and selective commercial banking services. UGB manages its investments in quoted equities and fixed income securities through a combination of in-house and independent portfolio managers. At end 2011, UGB’s total assets were $1,771m and total capital was $703m.
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