At the same time, Fitch has affirmed GIB's UK-based subsidiary Gulf International Bank UK's (GIBUK) Long-term IDR at 'A', Short-term IDR 'F1' and Support Rating '1' and simultaneously withdrawn the ratings. A full list of rating actions is at the end of this rating action commentary.
Susbidiary Rating Action Rationale
Fitch has withdrawn GIBUK's ratings as they are no longer considered by Fitch to be relevant to the agency's coverage. Accordingly, Fitch will no longer provide ratings or analytical coverage for GIBUK.
Rating Drivers: IDRs, Support Rating, Senior Debt and Subordinated Debt
GIB's Long- and Short-term IDRs, Support Rating and senior debt rating reflect Fitch's view of an extremely high probability of institutional support from its majority shareholder, the Saudi Government's Public Investment Fund (PIF) which holds a 97.2% stake. Saudi Arabia has a Long-Term foreign currency IDR of 'AA-'/Stable. Support from GIB's Saudi shareholders has been clearly demonstrated in the recent past, including significant capital injections and the purchase of GIB's substantial structured investment portfolio. 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).
In Fitch's view, the extremely high probability of support from Saudi Arabia would extend to subordinated debt (USD478m at end-2012). Therefore, the subordinated debt rating is notched from GIB's Long-Term IDR, rather than the notching from the VR typically applied in countries outside the region.
Rating Sensitivities: IDRs, Support Rating, Senior Debt and Subordinated Debt
GIB's support-driven IDRs, Support Rating and Senior Debt rating are sensitive to a rating action on the sovereign rating of Saudi Arabia, or a change in Fitch's view on the willingness of the authorities to support the bank. This is considered unlikely at present. The subordinated debt rating is sensitive to any movement on GIB's Long-term IDR.
Rating Drivers: Viability Rating 3>
The VR reflects the GIB's improved financial metrics, particularly its strong liquidity and capital position, while also considering its weak profitability and the execution risks of expanding into retail banking. GIB has made good progress in restructuring and strengthening its risk profile since it ran into difficulties during the global financial crisis. Its balance sheet has been transformed, with loan leverage (net loans/equity) reducing to 3.3x at end-2012 (end-2008: 6.7x), due in part to GIB exiting low-yielding syndicated and project finance loans.
The loan book expanded 5% yoy in 2012, following several years of balance sheet deleveraging. Net income increased 13%, although profitability metrics remain subdued, reflecting GIB's smaller balance sheet, a low net interest margin (1.0%) and a relatively high cost/income ratio by regional standards (2012: 54%). Fitch believes the bank's shift into higher-yielding lending will support profitability in 2013. However, operating costs may remain elevated in light of the bank's expansion focus.
Non-performing loans (NPLs) fell to 4.5% of total loans at end-2012. Reserve coverage is very strong and provides a healthy buffer to withstand moderate shocks. Current asset quality trends imply that impairment charges are unlikely to materially rise again in the near term.
GIB has significantly strengthened its funding profile, including raising stable customer deposits and improving the term structure of wholesale funding. The latter highlights the bank's ability to leverage its Saudi government ownership to source external funding when global liquidity conditions are tight. Fitch views GIB's capitalisation as strong, with a Fitch core capital ratio of 18.1% at end-2012. GIB's capital provides a good buffer for expansion or potential weaker asset quality as it ventures into new products and markets.
Rating Sensitivities: Viability Rating
Negative pressure on the VR could occur from a prolonged delay in the new retail strategy becoming profitable or any negative developments that erode the bank's capital buffer. These could come, for example, from uncontrolled loan growth, a spike in NPLs or rapid expansion into new international investments, none of which are in Fitch's base-case assumptions. An upgrade of the VR would likely require improved profitability metrics and the successful implementation of the new expansion strategy.
Subsidiary and Affiliated Company Key Rating Drivers
GIBUK's debt ratings are aligned with those of its parent, because of the extremely high probability of support, if needed, from GIB (and ultimately PIF), considering GIBUK's integration within GIB, its strategic importance to the group, as well as the unlikely sale of GIBUK in its current state and huge reputational risk of subsidiary default. GIBUK does not have a VR, reflecting its integration with its parent and lack of a meaningful standalone franchise that could exist without the ownership of the current parent.
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 was established in 1976 to give Saudi investors direct access to global financial markets. The bank is active in client-related treasury and asset-management services. In 1999, it became a wholly-owned subsidiary of GIB.
The rating actions are as follows:
Long-term IDR affirmed at 'A', Outlook Stable
Short-term IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '1'
Senior unsecured debt affirmed at 'A'
Subordinated debt affirmed at 'A-'
Long-Term IDR affirmed at 'A' with a Stable Outlook; rating withdrawn
Short-Term IDR affirmed at 'F1'; rating withdrawn
Support Rating affirmed at '1'; rating withdrawn