Fitch affirms Gulf International Bank at 'A'; downgrades Individual rating to 'C/D'

Simultaneously, Fitch has affirmed GIB's Long-term Issuer Default rating (IDR) at 'A' with Stable Outlook, Short-term IDR at 'F1', Support rating at '1' and Support Rating Floor at 'A'. GIB's dated subordinated debt obligations are affirmed at 'A-' (A minus).

At the same time, Fitch has downgraded the Individual rating of Gulf International Bank (UK) (GIBUK) to 'C/D' from 'C'. GIBUK's other ratings are affirmed at Long-term IDR 'A' with Stable Outlook, Short-term IDR 'F1' and Support '1'. GIBUK is a wholly-owned subsidiary of GIB.

The downgrade of GIB's Individual rating reflects the bank's considerable, mainly structured credit market-related, impairment charges and trading losses of $1.05bn in 2007, equivalent to a very high 57% of end-2006 equity. This has led to GIB reporting a net loss of $757.3m for 2007. The downgrade also reflects uncertainty over the extent of the potentially damaging effect these losses could have on the bank's franchise, funding and prospects.

Impairment charges made in 2007 were largely related to exposure to structured investment vehicles (SIVs) and collateralised debt obligations which include US sub-prime residential mortgage backed securities; market conditions for these instruments are currently extremely adverse. At end-2007, 98% of GIB's available-for-sale debt securities were investment grade. GIB appears to have used conservative assumptions in determining 2007 impairment charges. These charges include significant portfolio provisions that are likely to cover a substantial part of any further structured credit-related impairments not yet specifically identified. Nevertheless, further impairment charges are possible, stemming from residual but considerably reduced exposure to sectors hit by current adverse market conditions.

GIB's IDRs and Support rating reflect the extremely high probability that the bank would receive financial support from its shareholders, in case of need. This has been demonstrated by the timely $1bn capital injection committed by GIB's shareholders in December 2007, which maintains GIB's adequate capitalisation. GIB's Basel II capital adequacy ratio was 13.8% at end-2007. The six member states of the Gulf Cooperation Council (GCC, consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) currently collectively hold 72.5% of GIB's shares in equal proportions. The remaining shares are currently held by the Saudi Arabia Monetary Agency.

The downgrade of GIBUK's Individual rating reflects its substantial structured credit market-related trading losses in 2007. GIBUK's strategy has been revised. Credit risk within the proprietary trading positions was reduced considerably during the latter part of 2007 and is expected to continue to reduce in 2008 due to the bank's strategy of closing proprietary portfolios to new positions.

In January 2008 the bank restructured its business to focus on client-related activities in treasury and asset management, where it continues to be a GCC market leader. Management expects this core business to perform well, generating revenues dominated by stable client-based income on a reduced cost base. Nevertheless, the downgrade reflects uncertainty over GIBUK's franchise and prospects. GIBUK's IDRs and Support rating reflect its 100%-ownership by GIB and the support it could expect to receive from GIB's shareholders.

GIB's core business is providing commercial and investment banking services to corporate and institutional clients in the Gulf; this performed well in 2007, where healthy growth in net interest and fee income contributed to operating profit before impairment charges and trading losses of $287.8m. GIBUK is a London-based financial institution active in treasury and asset management.