Moody's changes to negative the rating outlook on Gulf International Bank

The bank's C- Bank Financial Strength Rating (BFSR) is affirmed and retains its stable outlook.

Moody's cautions that the bank's material investments in US residential mortgage-backed securities (RMBS) and structured investment vehicles (SIVs) could put pressure on the bank's intrinsic financial strength, should their values continue to decline.

At current market valuations, Moody's estimates that GIB will have to make significant provisions and fair value adjustments this year. However, the rating agency notes that the bank's $500m rights
issue in March 2007 has reduced the possibility that such value adjustments will cause the bank's capitalisation metrics to fall below levels consistent with current ratings.

Notwithstanding the current position, Moody's considers that, given the size of GIB's exposure to these assets, a further deterioration in the valuation of US RMBS and SIV investments globally over the coming months could put additional negative pressure on GIB's earnings and solvency, such that it would require the addition of new capital. In such circumstances, Moody's could decide to lower GIB's deposit ratings if the
impact on earning power proves to be more than temporary, or if sufficient capital to restore the bank's capitalisation metrics was not made available in a timely manner.

In changing the rating outlook, Moody's notes that current losses are unlikely to affect the bank's merchant banking franchise in the GCC, or its medium-term earning capacity. Moreover, although the bank is reliant on wholesale sources of funding, Moody's believes that the regional source of these funds and the historical stability of its funding base are likely to shelter the bank from possible liquidity pressures associated with the global credit squeeze.

Finally, Moody's notes that the change in the outlook for the A2/Prime-1 deposit ratings and A3 subordinated debt does not reflect a change in its view on the very high likelihood of external support, in case of need.

Headquartered in Manama, Bahrain, GIB reported total assets of $28.3bn at the end of September 2007.