Gulf Bank Kuwait - On the Mend. No More Loans to Saudis.

A banker's memory is a wonderful thing.  
Even the most painful experiences can be forgotten. 

Michel Accad gave an interview at the Reuters Middle East Investment Summit in which he made the following points:

1. 3Q10 is the turning point in GB's two year strategy to rebuild.  
2. Each subsequent quarter will be a relative improvement over the previous.  
3. By 3Q11 the rebuilding will be done (apparently one quarter ahead of time) and the bank will move to strengthen its income generation or its geographic coverage.
4. The goal is to increase local market share from today's 12% to some 16% in five years.
5. After 3Q10, the Bank will not need to provision as much but will continue to do so for precautionary reasons (rather than need).
6. The Bank has decided not to make any loans to Saudi clients for at least 3 years.  No doubt a reaction to its troubles with AlGosaibi and Saad Groups.  
7. Instead it will, however, make loans to foreign investors for their projects in Kuwait. And no doubt concentrate on its high quality Kuwaiti clients.
8. As of 3Q10, the Bank has successfully reduced its non performing loans below 20% of the total portfolio.  That's a lot of "Saudi" clients, it appears.

Gulf Bank: The Golden "Prize"

 

The Gold's There.  Look Closer.

According to the informed sources of Al Watan, a European Group is now bidding to acquire a significant/meaningful share in Gulf Bank through the services of a Kuwaiti intermediary.  And is therefore bidding against the Qatari Group.

The article goes on to say that GB is expected to declare a profit of KD35 million for the first nine months of 2010.  3Q10 provisioning is expected to be much less than during the first two quarters this year  because GB has provisioned 100% of Saad and Al Gosaibi exposure (KD 120 million!) plus 100% for The Investment Dar, 50% for Global,  and 50% for Aayan Leasing and Investment.

Anyone out there know if the provision levels for TID, Global, and Aayan are Central Bank mandated?  Or if they're just GB's calculations.

I guess Global may be among the worlds leading investment banks  for M&A as Mr. Al Sumait said not so long ago (a post is coming on that topic) but seems to be in rather poor company with respect to its loan repayment prospects.  Half full or half empty?  But nonetheless better than some others.

HSBC: “No Provision Relief for Kuwaiti Banks Until 2012”

AlQabas published a summary of a recent HSBC research report in its Sunday issue.

Here's a quick summary of the main points:

1. HSBC notes the dramatic growth in distressed loans at Kuwaiti banks – from 5.3% in 2008 to 9.7% in 2009. 
2. And predicts that the banks will continue to make substantial provisions this year and next only reaching a normal level of provisions in 2012. 
3. That being said, there should be a recovery in ROE for 2010.
4. Banks in Abu Dhabi and Kuwait were the worst affected among GCC banks. However, Kuwait has average provisions equal to 10% of total loans while Abu Dhabi only 4%. 
5. A concentration on loans to real estate, construction, and investment companies is responsible for the decline in the value of Kuwaiti bank assets. 
6. Real estate exposure:  Given the absence of Kuwaiti government spending on infrastructure or development projects during the boom years (2005-2008) credit was to the private sector largely to individuals and unlisted companies. The focus was on commercial, residential and investment real estate. Listed real estate companies only account for 13% of the total of such loans. 
7. Investment firm exposure:  Loans to investment companies were KD2.8 billion with KD1.2 billion to conventional firms and KD1.5 billion to "Islamic" firms.  The loans granted were largely used to fund investments in real estate and regional stock markets (thus increasing the lenders' total exposure to these sectors). 85% of investment companies' assets are in the GCC as per the IMF. Since the crisis hit, banks have seen their loan security drop by at least 50% as per HSBC's estimates, though it does note that in the absence of transparency the true impact is not known. 
8. Consumer loans:  These extensions of credit are believed to be of better quality because  they are secured by rentals and salaries. HSBC notes that most Kuwaitis are employed by the Government, the implicit presumption being that their incomes are secure.
   

There were two interesting tables accompanying the article, which I've reproduced below.

First, Kuwaiti bank exposure to real estate as a percentage of shareholders' equity.

Amounts in KD millions.

Bank	Real Estate & Construction ("REE")	Shareholders Equity	REE % of Equity
NBK	1,450	1,871	78%
CBK	733	440	167%
Burgan	976	422	232%
KFH	1,591	1,537	194%
Gulf	1,495	391	382%

Second, Kuwaiti bank exposure to investment companies.

Amounts in KD millions.

Bank	Exposure	% of Total	Shareholders' Equity	Exposure as % of Equity
Gulf	486	18%	391	80%
Burgan	190	7%	422	45%
CBK	269	10%	440	61%
NBK	216	5%	1,871	12%
KFH	944	34%	1,537	61%
Others	658	26%	----	----
Total	2,763	100%	----	----

 

From the above one can draw some conclusions on relative business models and underwriting standards.  

Of course without knowing the details of the loans and in particular the security obtained, these can be only preliminary. 


As usual, the pattern seems to be repeating itself.  One bank is distinguished by its prudence.  And some of the same names seem to be pushing the envelope. 

Gulf Bank to De-Emphasize Investments and Focus on Core Banking Business

Issa Abdul Salaam at Al Qabas quotes informed sources that Gulf Bank is exiting several funds and reducing its share in others during the rest of the year.

GB reportedly withdrew from one fund it had invested in the "past months" with a view to realizing profits in 3Q and 4Q this year and that it intends to exit from several foreign funds.

This represents a change in strategy from that approved by the previous board.  The new board's strategy calls for the bank to focus on its core (banking) business.

Three comments:

1. Sticking to one's core competence is a sensible strategy.
2. Many a change in strategy is motivated more by the need for cash than  long range planning.  The number of lines of business that suddenly become "non core"  are in direct proportion to the cashflow deficit.  Gulf Bank certainly has some serious challenges in its loan portfolio.
3. When picking the "core" business to focus on, it's good to pick one that one has a future.  Whenever I read PR from some firm announcing that it  has made a strategic decision to focus on its core business, I wonder why it wasn't in the first place.  I also recall two business school cases.  In the first,  Pan American Airlines, the company divested itself of Intercontinental Hotels to focus on its airline franchise.  By contrast, in the second, Greyhound/Dial Corp, the dogs were (largely) sold.  One positive thing in this case, the core commercial banking business is a protected one in Kuwait.  And there's probably more of a long range future in commercial banking in Kuwait, if one can get credit underwriting right.

Public Prosecutor Stays Gulf Bank Case Against Derivatives Client

Citing parties close to the case, Al Qabas reports (or at least I think so) that the Public Prosecutor has stayed Gulf Bank's case against its client responsible for the derivatives debacle in 2008 (when GB lost some KD359.5 mm leading to the surgical removal of its board and elements of senior management along with the KIA taking a significant stake to top up the needed capital restoration).

I say I think so because I'm not quite sure that my translation of " النيابة العامة حفظت القضية المرفوعة من قبل بنك الخليج "  is correct.  Sadly, AA didn't graduate from KU's Faculty of Law.

Anyone out there who can confirm or correct my translation, please post.

Gulf Bank: How "Improved" Are Their Financials?

One of our newest readers  raised two interesting questions via our contact page:  

1. He's heard rumors that GB is engaged in restructuring of several large exposures and wondered if I had any insights.
2. Indirectly he asked about the seeming improvement in GB's financials.

Gulf Bank Loan Restructuring

I have no special insight into what's going on at GB.   Perhaps some of our regular readers/commenters - Laocowboy2, The Rageful Cynic, Advocatus, or anyone else out there - may.  If so, please post a comment.

In the interim some speculation. 

Banks restructure loans for a variety of reasons:

1. To agree a repayment schedule with a distressed borrower that provides a reasonable probability of repayment.  The rationale here is to avoid legal proceedings unless absolutely necessary as these generally result in "wastage" of the debtor's estate, particularly in those jurisdictions where creditors' rights are weak.
2. As a pre-emptive strike to keep a loan from falling into the NPL category. 
3. To surgically remove NPLs from the distressed column and transfer them to "restructured" and eventually "performing" loans.  This lowers the total of NPLs and improves the provisions/NPLs ratio.  At FYE09, GB's Specific Provisions covered 43% of NPLs versus 63% a year earlier.  Between FYE08 and FYE09, GB's NPLs increased 138% from KD482.5 million to KD1,148.6 million.  2009 Annual Report here.

The last two can be largely cosmetic - to "manage" problems or at least the appearance of problems.  

Certainly, GB has a sufficient stock of NPLs that it should be busily restructuring away for the substantive first reason mentioned above.  Whether it is engaged in any cosmetic restructuring is not known.

Gulf Bank's Financials - Improved or Not?

Many have noted that for 1H10, GB reported  KD2.1 million in net income versus a loss of KD7.5 million for 1H09.   That certainly looks like an improvement.  But is it?

Two factors were responsible for this apparent improvement:  an increase in the net interest margin of KD11.2 million and an increase of KD22.7 million increase in Operating Income (excluding interest).  Let's take a look at each of them to see where the improvement arises - and if it is due to improvement in the business or to other factors.

The improvement in the net interest margin can I think be explained by three factors.  

1. First, interest expense in 1H09 driven by the aftermath of GB declaring a KD359.5 million loss for FY2008.  If you look at FY2009, GB had total interest expense of some KD119.4 million for the year.  From the comparatives in the 1H10 report, we see that interest expense for the 1H09 was KD72.1 million - 60.4% of the full year total.   Once GB had successfully recapitalized itself, its cost of funds declined in 3Q and 4Q09.  So is the improvement here an improvement in market sentiment due to the raising of KD376 million in new equity? And not a fundamental improvement in the underlying business.
2. Second, pricing increases.  There was an interview with Michel Accad in which he mentioned that GB had repriced (upwards) its facilities.  For some reason, GB no longer breaks out interest income by LOB which would allow an approximation of the gross yield on its loan portfolio.  It stopped with its FYE2009 Annual Report.  Wonder why the change?  With this info we could attempt to quantify the impact of any pricing change between 1H09 and 1H10. to see if indeed  margins had improved.  Using that method for 1H09, we get a gross annualized yield of about 5.6%.  Using this method through 3Q09, the yield is about 5.4%.   If we use the same split between Commercial Banking and Treasury interest as in 2009 (83% as of 1H09 or 84%  for the first nine months of the year 2009) for 1H10,  the 1H10 yield on the loan portfolio is actually lower:  4.9% (1H09 interest split) or 5.0% (Full 3Q09 split).  But that may be an incorrect assumption.  Note to Regulator:  More transparency rather than less is highly desirable.  Note to GB:  Unless you've got something you'd like to hide disclosing this information would be very helpful. Final Note:  This analysis is not conclusive.  The missing step is to see what happened at other Kuwaiti banks'  gross yields to get an idea about the macro environment.
3. Third, as GB continues to aggressively provision for loans (some KD108.5 million so far this year) it reduces its funding cost.  One would expect that the NPLs were already on non accrual so that the provisioning would affect interest expense primarily. One might say that provisioning is inversely related to problems.  On that score, there really doesn't seem to be a fundamental improvement in  the business.

The improvement in Operating Income (excluding Net Interest Margin) is largely explained by "Realised Gains on Disposal of Available for Sale Investments" of KD22 million roughly KD18.2 million over 1H09's earnings for the same category.  A decrease in "Impairment Losses on AFS Investments" of 3.8 million accounts for the rest.

Some observations.

1. Without the AFS asset sale (not a core constituent of GB's commercial banking franchise but a Treasury activity), GB would have recorded an Income Statement loss of KD20 million for 1H10 as compared to the KD7.5 million loss it recorded for the comparable period in 2009.
2. But there's more.  Since GB had already recognized KD20 million of profit on these assets in its fair value reserve (Statement of Comprehensive Income), its Comprehensive Income  for 1H10 was  a KD18.5 million loss versus a KD11.4 million gain for 1H09.  Looking at the Balance Sheet, you'll notice that Shareholders Equity declined KD21 million between FYE09 and 1H10.   And that's the bottom line on financial health - growing equity.  If you're wondering, the extra bit (KD2,5 million) is movement in GB's Treasury Share Reserve.

On a segmental basis, GB's commercial banking division did not make a profit in 2008, 2009, or 1H10.  And I'd note that GB was unable to allocate KD246 million of its 2008 "expenses" to either segment.  Perhaps, they properly belonged as "management overhead"?  

So at this point taking all these factors into consideration, I'd suggest a pause before speaking about "improved" financials.  

There's still a way to go.  To determine when real progress has been made keep your eye focused on:

1. Comprehensive income, looking for a positive number and an increase in Shareholders' Equity from "income" from one period to the next.
2. NPLs and provisions, looking for both to decline.  For provision coverage ratios to increase.
3. Meaningfully positive results in GB's core commercial banking franchise.  As Michel Accad said in part in the 2009 Annual Report in discussing GB's strategy:  "We have redefined our Vision; we seek to dominate the local retail and commercial banking space ..." If commercial banking/retail banking is the key, then GB will be healthy when those businesses are healthy.  Today they're not.

Gulf Banks: Some Wilt and Some are Apparently Ruder (At Least Healthwise)

A couple of interesting articles in the Financial Times over the past two days.

In one the remarkable recovery of Gulf Bank Kuwait is diagnosed.   Indeed quite a dramatic recuperation.  Its health much "ruder" than before.

Though with a third of its loan portfolio distressed, a need to provision just about all its earnings (except a cosmetic profit) to cover its currently recognized bad loans, and an ongoing fire sale of the ubiquitous but apparently solid "non core" assets to fund its core assets (the loan portfolio?), Gulf Bank is not yet out of the intensive care ward.

One does have to wonder how a bank achieves both a meltdown in loans and derivatives in the same time period.  Success in achieving just about every commercial banker's dream?  Building an investment banking business to rival its commercial business. 

Hopefully, Michel will be able to turn around the bank.  With a chronic case like this one, careful clinicians will want to ensure that (temporary) remission  is not confused with a (permanent) cure.  The surgical removal of the old Board  and elements of management by the KIA no doubt a necessary but not sufficient part of the treatment.  As to core competencies in commercial banking, - another element in the  cure - I'm assuming Michel is speaking prospectively and not retrospectively. 

Now to the next article:   a "blistering" analysis of defects in business models at the Gulf's so-called "investment banks".   You'll have to look rather closely in the picture immediately below to glimpse the wilted remains of some former investment banking titans of the GCC.  But I assure you they are there.

Sahara Desert

 Copyright fr:Utilisateur:Jgremillot 

  GNU Free Documentation License,

There has been a lot of soul searching at GCC investment firms to determine what went wrong.  

As I've pointed out before, many experienced and serious thinkers have come to the conclusion after no doubt very careful study that it was someone else's fault.  When the going gets tough, the tough find a scapegoat.  And an excuse.  The global financial crisis is generally identified as the villainous culprit.  As a matter of good form, I will again note that as a matter of definition that term is all lower case. 

In his article Robin Wigglesworth adds:

"The financial crisis has highlighted severe shortcomings in risk management, over-exposure to real estate and a reliance on paper gains on proprietary investments rather than recurring fee-based revenue, with disastrous results for some houses."

Some firms.  Indeed!  But not all.

While a generalized macro economic shock will lower all boats, it is usually the weakest links that get hurt the most. 

What then explains how the uneven effects on firms?

A study which considers "sharp" business practices and the state of ethics as causative factors might be quite enlightening.  A potentially "tricky" topic for discussion with financial firms that profess to follow the teachings of a noble religion, I suppose.

It would also have been informative to hear from some of the regional investment banks who emerged as "going concerns" after the crisis.   But then reporters cannot compel interviews.  With the summer months no doubt many have fled for more temperate climes.  Others may feel that discretion at this time is advised.

Gulf Bank Sues AlGosaibi and Saad Groups in Saudi Arabia

According to Marwan AlBadr of  AlQabas, Gulf Bank filed suits in Saudi against both AlGosaibi and Saad in two legal forums:

1. The Negotiable Instruments Committee - which deals with bank checks, letters of credit and similar instruments.  The NIC has set a hearing for March 2011.
2. The Committee for the Settlement of Bank Disputes - which is a SAMA committee to resolve disputes over loans and lines of credit.

It's expected that other banks will follow suit with suits in Saudi.

Gulf Bank - 25% (?) of Loan Portfolio Doubtful

Update 27 April:  A reader has pointed out that I overlooked the collateral held by GB and outlined in Note 26 of the 2008 fiscal year end financials.  "Problem" solved.  Clearly, it really pays to read the entire financial report.

AlWatan carries remarks from Michel Accad, CEO of Gulf Bank, in which he states that 25% of GB's loan portfolio is doubtful of collection.  On the positive side GB has reserves equal to 87% of the doubtful amount.

In discussing 1Q10 results he noted the that the operating results included KD14 million from the sale of the investment portfolio, making GB's recurring earnings about KD30 million, noting that KD25 million  to KD30 million was an expected quarterly run rate.  

He also said that he anticipates that GB won't require provisioning (presumably heavy provisioning) in the second half of the year.

I must confess I don't follow the math here. 

Using 25% doubtful portfolio, GB has heavy provisioning for at least the rest of the year. Unless Michel is referring to only a part of the portfolio.  Using 87% cover also suggests that provisioning will require more than one quarter.  If we assume that devoting 2Q10's projected KD30 million brings provisions to 100%, then doubtful loans are roughly 15% to 16% of the gross portfolio.  I suppose another explanation could be that GB is not targeting 100% cover of doubtful loans.

Here's the analysis.

Since detailed information on the loan portfolio at 31 March 2010 is not available in GB's 1Q10 interims,  we'll have to use Fiscal 2009 data as our analytical starting point.  

At 31 December 2009, GB's gross loan portfolio was KD3.787 billion and Loan Loss Reserve ("LLR") KD0.522 billion.  So net loans were KD3.266 billion. 

At 31 March 2010 the net loan portfolio was KD3.163 billion.  GB added roughly KD43 million to its LLR, thus a reasonable assumptions is that the LLR at 31 March was KD0.565 billion.

If this represents 87% cover of doubtful loans, then doubtful loans are some KD0.649 billion.  However, 25% of Gross Loans (estimated as the sum of  KD3.163 billion net loans plus the LLR of KD0.565 billion) = KD0.932 billion.

Using the lower estimate of doubtful loans of KD0.649 billion, then GB is KD84 million short.  Which would seem to imply provisioning away most of the rest of the year's income using a KD25 million to KD 30 million quarterly run rate.  Obviously with the higher KD0.932 billion estimate, heavy provisions continue into next year.

If we assume one more quarter of provisioning income will do the trick, (as implied by Michel's statement) then that would take loan provisions to KD0.595 billion.  That's more like 15% to 16% doubtful loans.

Anyone out there with an explanation or comment, please post.

Gulf Bank First Quarter Earnings - Massive Provisioning

AlQabas carries comments by Mr. Ali Rashid AlBadr, Chairman of GB in its Monday issue.

He said that 1Q10 operating profit was some KD44.3 million versus KD15.6 million in 1Q09.  This year's operating profit included KD14 million from the sale of investments.  Mr.AlBadr said that the Board decided to devote almost all of the first quarter's operating profit to strengthening the loan loss reserve to cover certain existing facilities.  Average capital adequacy is up to 17.4% from 15.9% at FYE 09.

He noted that the economy was turning and that the bank's prospects for the remainder of the year looked good.

During 2009, GB took net provisions of some KD111.1 million = KD148.7 mm specific provisions (for identified weak credits) less reversals of KD 39.6mm from general provisions and loan write offs of KD2.1 mm.  1Q10 provisions are roughly 30% of full year 2009, which suggests that GB has some provisioning catch up to do.  Perhaps, the remainder of its AlGosaibi/AlSanea exposure which the Central Bank has mandated must be provisioned at 100% by FYE 2010 as well as local Kuwaiti companies.  FYE09 LLR to Gross Loans stood at 13.8%.  So there is some real pain there.

Gulf Bank First Quarter Earnings Much Lower Than Expected

Gulf Bank announced its 1Q10 earnings on the KSE today (announcement, Arabic only, below).

Most news reports have focused on the sharp drop in net income from 1Q09:  KD524,000 for 1Q10 versus KD1,593,000 in 1Q09.  As of yet unexplained.

Quite a dramatic drop.

But, a couple things more.

1. Even at its old 1Q09 run rate, the ROE is rather dismal. And this is perhaps the more important story than the fluctuation.  How and when does GB achieve a reasonable ROE?  I'd note that NBK (and perhaps that's an unfair comparison) has a pro-forma projected 2010 ROE of more than 10 times GB's 2009 run rate.  And 32x 2010's projected run rate.
2. What appears not to have been noticed is that despite recording a modest profit in 1Q10, GB's shareholders' equity is down roughly KD9,977,000 from 31 December 2009.  Not a large amount as a percentage of equity, but 19x 1Q10 profit!

  

[8:45:52]  بلغ ربح (خليج ب) 524 الف د.ك لل3 أشهر المنتهية في31-03-2010‏

يعلن سوق الكويت للأوراق المالية أن مجلس ادارة بنك الخليج (خليج ب)‏
قداعتمد البيانات المالية المرحلية للبنك للفترات المنتهية  في 31-03-2010 ،
وفقا لما يلي:‏
ِ1) الفترات الحالية:‏
البند      ال3 أشهر المنتهية في 31-03-10    ال3 أشهر المنتهية في 31-03-09‏
الربح (د.ك)                      524.000                   1.593.000‏
ربحية السهم(فلس كويتي)           0                                   1‏
اجمالي الموجودات المتداولة    2.877.635.000            3.680.674.000‏
اجمالي الموجودات           4.515.779.000              5.134.144.000‏
اجمالي المطلوبات المتداولة    3.966.175.000             4.462.353.000‏
اجمالي المطلوبات            4.118.427.000              4.710.893.000‏
اجمالي حقوق المساهمين      397.352.000                  423.251.000‏
علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ ‏
يوم الخميس الموافق 22-04-2010.‏
بلغ اجمالى الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 1.596.000د.ك ‏
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 5.007.000‏
د.ك .‏

Kuwaiti Banks to Sue Saad and AlGosaibi This May

Following up on an earlier story, AlQabas reports that the lawyers for four local banks (named earlier as Kuwait Finance House. Commercial Bank of Kuwait, Gulf Bank and Burgan Bank) are putting the finishing touches on the "files" (cases) which will be filed in London and Riyadh.  Apparently, some of the loans (which are described as being no less than US$1.5 billion) are subject to Saudi law!

According to the article, the motive for pursuing the cases in Court is that negotiations weren't fruitful.

The article also mentions the ongoing suit by AlAhli Bank of Kuwait against Saad in the New York Supreme Court.

AlKhorafi Group Moves on Oula Fuel and Gulf Bank

AlQabas reports that the AlKhorafi Group has increased its stake in two Kuwait companies.

1. Oula Fuel (KSE Symbol 645):  A 40 unit gas and service station chain.  Shares were bought from National Investment Company by companies owned by Mahmoud Haidar (Emerald Group) in the amount of 38.2 million shares at KD0.420 per share (roughly KD16 million).  But shares were for the AlKharafi Group and other allied investors.
2. Gulf Bank (KSE Symbol 102):  A major commercial bank in Kuwait.  Major owners are the AlGhanem Family, Behbehani, KIA and now shown on the KSE website "Emerald and others".  Reportedly, AlKharafi has been buying shares in the KSE and is one of the major shareholders.  

AlQ reports that directors at both Oula and Gulf are expected to resign shortly so that AlK and his co-investors can appoint their own candidates to the Boards.

Gulf Bank Derivatives Case - Client Countersues

You'll recall that in 2008, Gulf Bank lost some KD360 million largely because of losses on FX derivatives reportedly involving the Euro and taken for the account of one of its clients who refused to settle.  There were also rumors at the time that one of the clients in question was a related party.   

AlQabas reports that Gulf Bank's client who Gulf Bank had sued has lodged a countersuit against Gulf Bank and requested that a court expert be appointed to study the derivatives and value them.  According to AlQ this is part of the client's legal strategy to tie up the case in the courts for years.  The anticipation being that the expert's review will take years.   Presumably as well once the expert rules additional experts may be brought in to challenge his findings.  With suitable opportunity for the other side to respond.

The links in this post provide a bit of further background on this story.

Lu'lu (Pearl) Real Estate Kuwait Delaying Resumption of Trading Pending Determination of Gulf Bank Legal Position on Derviatives Trades

AlQabas quotes informed sources that Lu'lu Real Estate Company is delaying the resumption of trading in its shares pending determination of Gulf Bank Kuwait's legal position regarding those firms who traded derivatives through it and caused the major losses (which led to a change in the Board at Gulf Bank and the KIA taking a significant stake).  And that Lu'lu (=Pearl) is apparently among this group.  The report states that Lu'lu is finalizing its 30 September 2009 financials (a pre-requisite for the KSE allowing it to trade again), but doesn't want to restart trading less Gulf Bank take legal action against it and cause its shareholders losses.

Some thoughts:

1. As I recall the story about Gulf Bank and the derivatives, these were largely foreign currency derivatives.  Many involving the Euro.  With allegations (not yet legally proven) that a good number of them were for related parties.
2. And that Gulf Bank's losses were caused when customers failed to settle their obligations.
3. It would seem to me that if Pearl (Lu'lu) were one of those customers, it might be reasonable for it to expect that Gulf Bank would expect it to settle up.  Just as if Pearl had a loan from GB, it wouldn't strain belief to expect that GB would want its money plus interest back.
4. You might be thinking as I initially did that Lu'lu's desire to pretend there wasn't a loss by delaying trading was a bit silly.   Losses don't occur when we open our eyes.  Or go away when we close them.  But, as long as no trading has occurred many parties will be valuing their Pearl stock at its last traded price.  And that could be very comforting for banks holding it as collateral for loans  who are adverse to booking provisions, for the borrowers themselves and for others ho don't want to recognize impairments in their own financials. 
5. As to resumption of trading, last time I checked (Thursday), Lu'lu owed the KSE financials for 30 June 2009 as well as 30 September 2009.  And shortly it will be past due on the year end financials.  It's intriguing to speculate if Lu'lu's delays are strategic in the hope that something good will happen before it resumes trading.
6. Finally, Pearl does have foreign projects at least one in Morocco and a hotel somewhere in the Eurozone - Germany or Austria.  So there would perhaps be some reason they might need an FX hedge.  One hopes that it was not among those many Kuwaiti firms who over the past few years found their core businesses less interesting than punting in the Kuwaiti Stock Market or making even wiser financial investments in markets on foreign shores.

Central Bank of Kuwait - Mandates Special Disclosure by Banks on Derivatives

This is a post from over one month ago (November 16 to be precise).  I made a small edit to it today and now it is on today's new posts lists.

About one year ago, Gulf Bank had a major loss arising from foreign currency derivatives undertaken for a customer who refused or was unable to settle.  Market speculation at the time was that the customer may have been a related party.  The loss was KD375 million requiring the recapitalization of the bank, including the Kuwaiti Government taking a 16% stake through KIA.

Today AlQabas reported that  the Central Bank of Kuwait ("CBK") issued instructions to local banks that they were to have their external auditors prepare a special audit report on their dealing in derivatives both for their own as well as customer's accounts. 

As per the press report, the CBK emphasized that the audit work and subsequent report should:

1. Review the sufficiency of the rules/principles of the system of internal control established and followed over this activity and its effectiveness
2. Examine extent of risks the bank might be exposed to, i.e., risk limits
   
3. Disclose the (financial statement) results of the existing position (of derivatives) as of 31 December 2009
4. Contain a statement outlining the development of the sufficiency and effectiveness of internal controls 
5. Compare the above points to the status as of the 31 December 2008 financials

The CBK warned that failure to provide this special report would be treated as a serious matter and would result in delays in the CBK approval of a bank's 2009 annual report.  Apparently the CBK wants to ensure that there are no more unwelcome surprises in the banking sector in 2009.

AlQabas believes that since Gulf Bank's 2008 problem, many local banks have closed their derivative positions or substantially reduced both volumes and riskiness of derivatives traded.