Bahrain-Based Gulf Finance House Lowered To 'BB+/B' On Weakened Stand-Alone Credit Profile; Outlook Negative

Published November 29th, 2009 - 11:47 GMT

The operating environment for Gulf-based investment banks continues to be unsupportive, weighing substantially on earnings and prompting revisions of business models.
We are lowering our counterparty credit ratings on GFH to 'BB+/B' from 'BBB-/A-3'.
The outlook remains negative, reflecting the bank's poor revenue prospects and expected difficulties in implementing its new strategy.
PARIS (Standard & Poor's) Nov. 26, 2009--Standard & Poor's Ratings Services today said it has lowered its long- and short-term counterparty credit ratings on Bahrain-based Gulf Finance House G.S.C. (GFH) to 'BB+/B' from 'BBB-/A-3'. The outlook is negative.

"The rating action reflects our opinion that GFH's stand-alone credit profile is no longer consistent with an investment-grade rating owing to uncertainties on the bank's implementation of its revised business model and delivery of sustainable profitability," said Standard & Poor's credit analyst Goeksenin Karagoez.

The ratings reflect the bank's stand-alone credit profile and do not incorporate any uplift for extraordinary external support. Weaknesses for the ratings are the bank's short track record and limited customer franchise, low business and revenue diversification, uncertainties regarding the implementation of the new strategy, and pressure on profitability in the near term. We view positively, however, the initiatives the bank has taken under its new CEO, including the recent $302 million rights issue demonstrating shareholder support, balance-sheet deleveraging, improving liquidity, and adjusting its strategy to reduce its risk profile.

With total assets of $2.5 billion on Sept. 30, 2009, GFH is an Islamic wholesale investment bank based in the Kingdom of Bahrain (A/Stable/A-1).

"The negative outlook combines our perception of the financial stress on GFH, stemming from the operating environment, with uncertainties on the bank's implementation of its revised business model and delivery of sustainable profitability," said Mr. Karagoez. "The sluggish economy is limiting investment placements and exits and putting pressure on the value of GFH's investments and financial performance. Still, we expect the bank's balance-sheet derisking exercise in progress to help it achieve further reductions in leverage."

We would lower the ratings on GFH if it is unable to implement its strategy and demonstrate that its revised business model can deliver more stable profitability and a lower risk profile. Ratings upside appears limited to us in the foreseeable future, because it would require a significant improvement in the bank's leverage, diversification, and recurring income stream.

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