Fitch affirms Gulf International Bank at 'A'; Outlook Stable

GIB's dated subordinated debt obligations are affirmed at 'A-' (A minus).

GIB's IDRs and Support rating reflect Fitch's view that there is an extremely high probability that the bank would receive support from its shareholders, in case of need. This was demonstrated by a timely $1bn capital injection announced in December 2007. The capital injection was necessary to maintain GIB's capitalisation at adequate levels following large impairment charges incurred in 2007 for SIVs and CDOs.

Following this capital injection, received in March 2008, GIB's shareholders were the six governments of the Gulf Cooperation Council (GCC) - Bahrain (7%), Kuwait (12%), Oman (7%), Qatar (12%), Saudi Arabia (17%) and the United Arab Emirates (7%) - and the Saudi Arabia Monetary Agency (SAMA, 38%). The Saudi government and SAMA have increased their GIB shareholding and now hold a combined 55% majority stake.

The Individual rating reflects Fitch's concerns about GIB's franchise, funding and prospects following large write-downs and mark-to-market losses suffered in H108 and 2007, as well as weakened liquidity and capitalisation. It also reflects strong asset quality in its loan book, adequate profitability of the core wholesale banking business, and the restructuring of its UK subsidiary which should lead to reduced market risks.

In H108 and 2007, GIB suffered large cumulative impairment charges ($1bn), mainly for investments in SIVs and CDOs with exposure to US sub-prime residential mortgage-backed securities. It also experienced large cumulative fair-value losses arising from its investment portfolio in the same period ($836m), and smaller but significant trading losses mainly from its UK subsidiary. This led GIB to report a net loss in 2007. Given adverse market conditions, further write-downs for structured credit investments are possible but are not expected to be as large as those already incurred.

Capital was supported through this turmoil by a $1bn capital injection from its shareholders. Nevertheless, Fitch views GIB's capital as weak given end-H108 negative fair-value reserves from investment securities of $745m; the latter largely arise from credit spread-widening given current extremely adverse conditions in the international credit markets.

Adequate underlying profitability was reflected in operating profits before impairment charges and trading losses of $133m in H108, driven by rapid loan growth (2007: 55%) with stable but thin margins, and healthy fee income growth. Asset quality in the loan book remains strong, with impaired loans a low 0.1% of end-H108 gross loans. Loan growth has mainly come from GCC project finance; rapid expansion has slowed to 4% in H108. Liquidity remains adequate, in Fitch's view, despite rapid 2007 loan growth and increased reliance on repo funding which reduced unencumbered liquid assets. Funding is wholesale and mostly sourced from the GCC. In Q207, GIB raised $1.2bn in five-year term finance.

Established in 1975, the Bahrain-based GIB provides wholesale banking services to corporate and institutional clients in the Gulf. Its GCC merchant banking strategy should allow it to benefit from regional economic growth.