Gulf International Bank − Outlook on LT FCR Revised to Stable Following Similar KSA Sovereign Action

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has revised the Outlook on Gulf International Bank’s (GIB) B.S.C. Long-Term Foreign Currency Rating (LT FCR) of ‘A+’ to Stable from Negative. This action follows the revision of the Outlook on Saudi Arabia’s sovereign LT FCR of ‘A+’ to Stable, from Negative, to reflect improved prospects for the country’s public finances as a result of the strong rebound in global oil prices over the past year and the implementation of fiscal consolidation measures. It is also driven by CI’s expectation that oil production volumes will expand significantly in the current year. The government budget balance is forecast to improve markedly on the back of rising hydrocarbon and non-hydrocarbon revenues. As a result, CI expects the Covid-related deterioration seen in government debt metrics to be partially reversed over the forecast horizon.

At the same time, CI has affirmed GIB’s LT FCR of ‘A+’, Short-Term Foreign Currency Rating (ST FCR) of ‘A1’ and Bank Standalone Rating (BSR) of ‘bbb-’ with a Stable Outlook. The Bank’s LT FCR and corresponding Stable Outlook currently mirror that of the Saudi sovereign, with the former benefiting from a five-notch uplift to reflect the very high level of government extraordinary support. The Saudi sovereign wealth fund Public Investment Fund (PIF) owns 97.22% of GIB’s shares, and this factor provides the strongest benefit to the Bank’s credit risk profile. In CI’s opinion, the authorities’ already strong capacity to provide extraordinary support to GIB in the event of need has improved.

The same factors that led to the improvement in the Sovereign Outlook have also benefited the macroeconomic climate in KSA and, in turn, are driving a recovery in the banking system’s operating environment as a whole. Headquartered in Bahrain, GIB’s credit exposure is mainly to Saudi Arabia and derived from cross-border lending and its Saudi subsidiary GIBSA. The latter is equally owned by GIB and PIF.

The BSR is derived from a Core Financial Strength (CFS) rating of ‘bbb-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb-’, which is higher than the OPERA of Bahrain (‘b+’) due to GIB’s substantial exposure to assets in lower risk countries (KSA and other GCC). The CFS rating is supported by GIB’s exceptionally high liquidity underpinned by customer deposit funding coupled with access to debt capital markets, and strong capitalisation. The geographically diversified balance sheet and currently satisfactory asset quality are also credit strengths. That said, in our view, NPL growth is likely to have been obscured by forbearance measures introduced by the regulators in response to Covid. The pandemic’s full impact on asset quality is therefore not expected to become apparent until late this year as and when forbearance measures end. GIB’s ratings remain constrained by the challenging wider GCC operating environments, including elevated credit risk due to the effects of Covid, and the ongoing weak operating and net profitability. The customer concentrations in loans and deposits also constrain the ratings, with this risk factor a reflection of the wholesale banking business model.

GIB’s FCRs are not capped by Bahrain’s sovereign credit ratings (‘B+’/‘B’/Stable), nor by CI’s assessment of Bahrain sovereign interference risk (Moderate – implying a foreign currency limit of ‘BB+’ for domestic/onshore banks). This is because the majority of GIB’s assets, liabilities and earnings are derived from Saudi Arabia (assets in Bahrain represented less than 5% of total), while Bahrain regulatory restrictions limit GIB’s links to the domestic economy. Moreover, in CI’s opinion, it is unlikely that the Bank would be subject to Bahraini transfer and convertibility restrictions. Extraordinary support from the Bahraini authorities is not factored into the ratings since it is uncertain whether such assistance would be provided to a wholesale bank in distress. The Central Bank of Bahrain (CBB) is not an official lender of last resort for wholesale banks.

Rating Dynamics: Upside/Downside Scenarios

A revision of the BSR Outlook to Positive from Stable appears unlikely at this stage as this would require a clear and persistent improvement in the Bank’s profitability at all levels and a sustained recovery in GCC operating environments.

Although not our current expectation, the ratings or Outlook could be downgraded over the next 12 months in the event of a significant deterioration in the Bank’s key financial metrics. A downgrade of the Bank’s LT FCR would need to be preceded by a downgrade of the sovereign or a change in CI’s view of the government’s willingness or ability to provide support.



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