Gulf Bank May Have Loss as Derivatives Contracts Sour

By Arif Sharif and Fiona MacDonald

Oct. 26 (Bloomberg) -- Gulf Bank KSC, Kuwait's fourth- biggest lender by market value, may suffer losses after some clients defaulted on derivative contracts linked to the euro, sparking concern regional banks may be further hit by the global financial crisis.

The losses were incurred on currency derivatives after a decline in the value of the euro versus the dollar, state-run Kuwait News Agency said today, citing central bank governor Salim al-Sabah. Gulf Bank will have to absorb the losses until an agreement can be worked out between the bank and its clients, the news agency cited the central bank governor as saying.

The defaults will have ``no major'' financial effect, Chief Executive Officer Louis Myers said today. He declined to comment on the size of the losses. Gulf Bank may have incurred losses of as much as 200 million dinars ($746 million) from derivatives contracts used for speculative trading or hedging, Ibrahim Dabdoub, chief executive officer of National Bank of Kuwait SAK, Kuwait's biggest bank, said in an interview to Al Arabiya TV.

Banks in the six Gulf Arab states, including Saudi Arabia and the United Arab Emirates, have largely sidestepped the $681 billion of losses and writedowns that banks across the world have taken following the collapse of the U.S. subprime-mortgage market. Gulf Bank joins lenders including Gulf International Bank BSC, which has written down $1 billion, and Abu Dhabi Commercial Bank PJSC and investment bank Shuaa Capital PSC, which between them have written down $174 million.

Bigger Issue

``This is certainly unwelcome news,'' Ali Khan, head of equities trading at Arqaam Capital Ltd., said in a phone interview from Dubai. ``If this trend were to gain momentum and other banks started reporting similar defaults then we would have a much bigger issue to deal with,'' he said.

The Kuwaiti central bank will support Gulf Bank ``with full force and guarantee depositors complete rights, locally and internationally,'' al-Sabah said. An auditor will be appointed to oversee Gulf Bank's treasury management and trading, he said.

The default on derivative contracts will have ``no major effect on the soundness of the bank's financial position'' and not affect its ability to continue business, Myers said in an e- mailed statement. The bank is ``working closely'' with authorities to resolve the issue, he said.

Gulf Bank, which has a market value of $4.4 billion, reported on Oct. 19 a profit of $322.8 million in the nine- months to Sept. 30. It had assets of 5.09 billion dinars at the end of March, according to data compiled by Bloomberg.

Shares Suspended

Gulf Bank shares were suspended from trading on the Kuwait Stock Exchange today. They last traded on Oct. 23, when they fell 4 percent to 950 fils, taking the decline this year to 36 percent.

``In volatile markets, you might expect some risk to contract enforcement,'' Raj Madha, a director of equity research at investment bank EFG-Hermes Holding SAE, said in a phone interview. Bank lending against shares is protected, although if the market declines 50 percent ``you could certainly imagine that a lot of people might not be inclined to make good any further shortfall, having taken very substantial losses.''

The Kuwait Stock Exchange's benchmark share index has lost 19 percent this year Middle Eastern markets followed global benchmarks lower on worries a slowing global economy and a U.S. recession will hurt company earnings. Saudi Arabia's benchmark index has fallen 51 percent this year, Dubai's is down 48 percent and Abu Dhabi's by 26 percent.

Dozens of traders walked off the trading floor at the Kuwait Stock Exchange on Oct. 23 and demonstrated outside the building to urge more government support for the market.

No Exposure

``We don't have any exposure on the derivatives market,'' National Bank of Kuwait's Dabdoub said in a telephone interview. ``We still expect to achieve good profits by year end. The banking system is sound and what happened to the Gulf Bank won't have any negative effect on the whole banking system.''

The euro has declined about 10 percent versus the dollar since the beginning of October as a global economic slowdown spurred demand for the U.S. currency as a haven for losses in emerging markets. This week's decline in the euro was its biggest against the dollar and the yen since the 15-nation currency's inception in January 1999.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net; Fiona MacDonald in Kuwait at fmacDonald4@bloomberg.net.