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Capital intelligence

United Gulf Bank’s ratings affirmed

: Saturday, June 21 - 2014 @ 11:40

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, on the grounds of the Bank’s strong ownership and demonstrated financial and liquidity support from its parent Kuwait Projects Company Holding K.S.C. (KIPCO). The Support Level of ‘3’ is maintained, reflecting the high likelihood of support from KIPCO. UGB’s Financial Strength Rating (FSR) is affirmed at ‘BBB’ and is underpinned by its good debt repayment record, access to term finance and short-term funding, and the sound quality of the investment portfolio. The ratings are also supported by the marked rebound in profitability in Q1 2014, notwithstanding the earnings volatility inherent in the business model. Factors constraining the ratings are the large asset and income concentrations, coupled with a relatively small balance sheet, low liquidity, dependence on market sources of funding, and high cost to income ratio. The Outlook for the ratings remains ‘Stable’.

UGB is a member of the diversified and well respected KIPCO Group in Kuwait. The completion of a major restructuring programme that was initiated at the KIPCO level several years ago was an important milestone for UGB, and underscores the parent’s goal to reorganise its financial services businesses. The effective sale and transfer of the Bank’s investments in four MENA banks to Kuwait-based Burgan Bank (BB, also KIPCO majority owned) allows UGB to concentrate on and enhance its investment banking and asset management capability for the KIPCO Group. In exchange for the transfer of those assets, UGB acquired a strategic 18% stake in BB. Although this equity interest has culminated in significant asset and income concentration risks, these are mitigated by BB’s high credit rating (‘A-’), sound risk metrics and systemic importance in Kuwait. BB’s shares are listed on the Kuwait Stock Exchange and thus could represent an important source of potential liquidity for the Bank if necessary. In line with the restructuring of UGB’s balance sheet, the overall quality of assets has strengthened in recent years, in part due to write-downs and the improvement in the risk profiles of key associated companies and subsidiaries – especially in Q1 2014.

UGB’s sources of funding remained adequately diversified and complemented by ample medium-term finance. Although there continues to be reliance on short-term interbank deposits (mainly from other KIPCO group entities), this source of funds has proven stable. BB in particular is expected to remain an important source of funding over the foreseeable future. The Bank has successfully paid down debt in recent years and significantly improved leverage and reduced maturity gaps. The increase in leverage in Q1 2014 was due to the consolidation of FIMBank, a deposit taking institution based in Malta. The strategy is to transfer FIMBank to BB in the near future. Although UGB’s level of liquid assets remains very low in relation to total assets, it has adequate liquidity to repay maturing short-term debt obligations as the Bank also has access to uncommitted short-term facilities through established bank relationships across the region and internationally. Capital adequacy declined noticeably in Q1 2014 as UGB raised its stake in FIMBank to 61%. However, the rights issue currently underway at the subsidiary is expected to restore UGB’s capital adequacy ratio.

Although the Bank’s profitability metrics weakened in 2013, having somewhat recovered in 2012, this was primarily as a result of a sharp decline in the share of profit from associates – particularly BB. Management had in fact projected a rebound in profitability in the year under review, but large precautionary provisions at BB have dented its bottom line, even though operating profit recorded a significant increase. UGB’s past provisioning requirements amid difficult global and regional financial markets had been compounded by a marked fall in operating profitability – which in turn negatively impacted net profit. Encouragingly, BB’s net profitability rebounded in Q1 2014 and this has significantly lifted UGB’s profitability at both operating and net levels.

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, UGB provides asset management, treasury, corporate finance and selective commercial banking services. UGB manages its investments through a combination of in-house and independent portfolio managers. At end 2013, the Bank’s total assets were $1,259mn and total capital was $460mn.

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Saturday, June 21- 2014 @ 11:40 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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