Fitch Ratings has affirmed Bahrain-based Gulf International Bank’s (GIB) long-term issuer default rating (IDR) at ‘A’ with stable outlook and upgraded its viability rating (VR) to bbb- from bb+. Fitch has also affirmed its subsidiary, Gulf International Bank (UK) Limited’s (GIBUK) long-term IDR at ‘A’ with stable outlook.
GIB’s IDRs are support-driven and reflect Fitch’s view of an extremely high probability of support from its majority shareholder, the Saudi Government’s Public Investment Fund (PIF), which holds a 97.2% stake. Support from the Saudi shareholders for GIB was clearly demonstrated in the recent past, including significant capital injections and the purchase of its substantial structured investment portfolio. Saudi Arabia has a Long-Term foreign currency IDR of ‘AA-‘/Stable Outlook. GIB’s ratings are not constrained by the Bahrain country ceiling of ‘BBB+’ reflecting the bank’s majority Saudi ownership, its wholesale banking licence, its primarily US dollar-based balance sheet and offshore banking business with limited exposure to Bahrain (both assets and liabilities).
Fitch has upgraded GIB’s VR to reflect the significant improvement to its risk profile from restructuring, de-risking and de-leveraging initiatives since it ran into difficulties during the global financial crisis in 2007/08. Management changes have been made and the balance sheet has been transformed. GIB returned to profit in 2010 after three years of losses, and performance continues to improve, with net income for 2011 rising to USD105m.
Following the sale of $4.8billion of structured investments to the majority shareholder in Q109, GIB’s investment book comprises primarily lower risk and liquid debt securities, including a sizeable holding of sovereign debt.
GIB’s balance sheet has declined by almost half over the past three years with the bank actively reducing loan leverage (net loans/equity) to 3.4x at end-2011 (2008: 6.7x) including by exiting low yielding syndicated and project finance loans. The non-performing loan (NPL) ratio declined to 6.7% at end-2011, in part due to restructuring several large problem loans. Concentrations in lending by both name and sector have also improved.
In addition, GIB’s funding and liquidity position has strengthened with improving term structure in wholesale funding. GIB has raised longer-term debt during 2011 at a relatively low cost, leveraging its Saudi ownership. This has enabled it to improve asset liability mismatches and reduce its reliance on expensive short-term funding. Additionally, customer deposits have grown, despite the political unrest in Bahrain, with GCC governments and government-related entities being major depositors in the bank. These developments have resulted in some concentration risk in deposits, although Fitch considers its Saudi government-related deposits in particular to be stable. GIB has a strong liquidity position, in Fitch’s view, even without relying on its large investment portfolio which provides a sizable liquidity buffer.
Fitch’s concerns about relatively low profitability and high concentrations on both sides of the balance sheet are mitigated by GIB’s strong capitalisation. Its Fitch core capital ratio of 19.1% provides a good buffer for potential weaker asset quality as the bank ventures into new markets and products.
In a significant shift from its historical wholesale banking model, GIB is converting into a GCC-wide universal bank. A key part of its new strategy is the launch of selective retail banking in Saudi Arabia in 2013 and plans and operations are at a fairly advanced implementation stage. Whilst the strategy is unproven, Fitch believes it to be credible, given the size of the Saudi retail market and the opportunities available.
Fitch expects GIB to build a much stronger and broader franchise over the near term, which ultimately safeguards its future. A prolonged delay in the retail strategy becoming profitable could have negative implications for its VR. The VR is also sensitive to any negative developments with expansion into new markets that start to eat into the capital buffer. This could come, for example, from uncontrolled loan growth or rapid expansion into new investments, neither of which are in Fitch’s base case assumptions.
GIBUK’s IDRs are aligned with those of its parent, GIB. The equalisation of the ratings reflects the extremely high probability of support, if needed, from GIB, and ultimately PIF, considering GIBUK’s integration within GIB and strategic importance to the group. Any change to GIB’s IDRs would affect GIBUK’s ratings. Downside potential could arise from a change in ownership or integration within the group, although Fitch believes that this is highly unlikely.
In Fitch’s view, the extremely high probability of support from PIF would extend to subordinated debt. Therefore, the subordinated debt rating is notched from GIB’s Long-term IDR rather than the typical notching from the VR applied in countries outside the region.
Headquartered in Bahrain, GIB is a leading regional bank offering wholesale banking, treasury and investment banking. The bank intends to launch a retail banking operation in Saudi Arabia as the initial stage of forming a GCC-wide universal franchise. GIBUK focuses on institutional asset management and treasury services.