PARIS: Standard & Poor’s Ratings Services revised its outlook on Bahrain-based Gulf International Bank (GIB) to stable from positive. S&P affirmed its BBB+/A-2 long- and short-term counterparty ratings on the bank.
The rating action primarily reflects our view that the economic environment in the Gulf Cooperation Council (GCC) countries is becoming less supportive for banks operating in the region. In this context, we recently revised our outlook on Saudi Arabia to negative from stable and lowered our long-term ratings on Bahrain and Oman to BBB’ and A’, respectively,” S&P in a statement said.
“In light of the sharp fall in international oil prices, we have revised our macroeconomic projections for the GCC countries, and we now expect economies in the Gulf to return to more moderate growth levels.
“The outlook revision on GIB reflects our view of the weakening operating environment in the Gulf region, and specifically in Saudi Arabia, where the bank conducts the majority of its business (more than 50% of the bank’s lending book is originated in Saudi Arabia). We consider that the economic slowdown will likely put pressure on the bank’s corporate client acquisition in the Gulf region. Its capacity to increase earnings may also be constrained by slightly rising credit risks.
“We find that the non-hydrocarbon sector relies to a significant extent on government spending (funded by hydrocarbon revenues) and downstream hydrocarbon activities. Given the knock-on effect on the private sector of potentially lower government spending or delayed government projects, we believe that the bank’s expansion in the mid-cap to large corporates market may entail increased risks. The bank has been gradually diversifying away from low-yielding structured finance or government-backed project finance transactions to the financing of better-yielding large and mid-cap corporates. We see the execution of this strategy as slightly more challenging in the current slowing economic environment, especially as it implies a change in the credit risk profile of the lending book,” it added.
“The long-term rating on GIB includes one notch of uplift to reflect our view of the bank as a government-related entity with a “moderately high” likelihood of timely and sufficient extraordinary support from the government of Saudi Arabia, if needed. The Saudi Arabian government owns 97% of GIB’s shares through the Saudi Arabian Public Investment Fund.
“The long-term rating on GIB is one notch above the level of our transfer and convertibility (T&C) assessment for Bahrain as we do not consider it to be a cap for the ratings on GIB. We believe that GIB is well insulated from sovereign and country risks related to Bahrain. GIB’s assets in Bahrain made up less than 5% of its balance sheet on June 30, 2014.
“The stable outlook reflects our view that the bank’s business and financial profile will remain relatively stable over the next two years. We factor in the expected benefits of the ongoing strategic initiative to develop retail banking activities, counterbalanced by its potentially increased risk profile. While we believe the gradual transformation of the bank could make its business model more solid, we expect the impact to be relatively limited over the next two years.
“We might raise the ratings on GIB if the contribution from the retail operations in Saudi Arabia is sufficient to strengthen GIB’s business profile. We could also consider an upgrade if we see higher-than-expected growth in core customer retail deposits that materially reduce the bank’s reliance on wholesale funding. We would be unlikely to raise the ratings before pressure on economic conditions in the Gulf abates. We see a downgrade as unlikely as it would require both the bank’s stand-alone creditworthiness to weaken and for us to lower the sovereign ratings on Saudi Arabia. A one-notch downgrade of Saudi Arabia or downward revision of the bank’s stand-alone credit profile (SACP)–for example, due to a sustained drop in capitalization–alone would not trigger a rating action on GIB, all other factors remaining equal.”