Gulf Bank's financial standing under scrutiny

Dubai: Kuwait-based Gulf Bank's financial standing was placed under scrutiny yesterday, while its chairman quit in the wake of steep financial losses.

Moody's Investors Services announced that it would review the C bank financial strength rating, as well as the Aa3 long-term local and foreign currency deposit ratings of Kuwait's second largest lender, for a possible downgrade.

Moody's rating action came on the heels of Gulf Bank's announcement last Sunday that it has incurred potentially sizeable losses from trading foreign exchange derivative instruments on behalf of its customers.

Moody's will be assessing the exact magnitude of the losses, the implications for the bank's franchise, issues related to controls and risk management, potential associated failures and the extent of the impact of the losses on the bank's capital and recapitalisation plans.

Panic hits

The losses earlier prompted the bank to stop trading its shares, causing panic to spread through the Kuwait Stock Exchange. Kuwaiti bourses have also suffered a serious fall, triggering protests from local investors demanding government intervention.

Analysts say Gulf Bank's "frightening" case is a reflection of the "inefficient supervision" of banks in the GCC and if no further government intervention is made, other banks could fall into the same trap.

Rolf Schneebeli, former vice president of Citibank Switzerland and currently the economic adviser to ARY, said it would be prudent for governments in the GCC to guarantee inter-bank transactions to at least get the financial markets running and kickstart the flow of credit to finance major projects and help financially battered individuals and private companies.

He said appropriate actions must be taken to ensure that banks in the GCC are run competently.

"What happened to Gulf Bank is a frightening case," Schneebeli told Gulf News. "The central banks are challenged right now and if this situation continues, it will have a negative impact on the economy. There are two challenges, one is to make sure there is enough liquidity in the markets, and the other is to make sure that stupid people are not running the banks."

Deposits guaranteed

Gulf Bank's losses stem-med from the failure of some customers to honour their obligations in the transactions. The bank's announcement of the steep losses also resulted in a run on customer deposits, which prompted Kuwaiti officials to guarantee deposits not only in Gulf Bank, but in all of the country's banks.

"The bank has yet to disclose details on the nature of these transactions, but Moody's understands that they involved complex instruments," Moody's said in a statement.

"According to the rating agency, this therefore raises questions as to whether the underlying risks assumed by customers, and by extension by the bank, were properly identified and managed."