Gulf International Bank’s Ratings Affirmed

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Gulf International Bank (GIB) at ‘A+’ and ‘A1’, respectively. The Outlook for the LT FCR is affirmed as Stable. At the same time, CI Ratings has affirmed GIB’s Bank Standalone Rating (BSR) of ‘bbb-’, with a Stable Outlook, Core Financial Strength (CFS) rating of ‘bbb-’, and Extraordinary Support Level (ESL) of Very High.

The Bank’s LT FCR is set five notches above the BSR to reflect the very high likelihood of extraordinary support from the Kingdom of Saudi Arabia (KSA, ‘A+’/‘A1’/Positive) in case of need. This is based on the Public Investment Fund’s (PIF) – the KSA sovereign wealth fund (SWF) – 97% ownership of GIB, and the Saudi government’s strong capacity, willingness and consistent track record of providing capital and funding support to the Bank. Given the strength of the KSA sovereign, CI considers this factor to provide the most important benefit to GIB’s credit risk profile.

The Bank’s FCRs are not capped by Bahrain’s sovereign credit ratings (‘B+’/‘B’/Stable) or by CI’s assessment of Bahrain sovereign interference risk (Moderate – implying a foreign currency limit of ‘BB-’ for domestic/onshore banks). This is partially because the majority of GIB’s assets, liabilities and earnings are derived from Saudi Arabia, followed by UK and US (Bahrain assets represented less than 5% of total) while Bahraini regulatory restrictions limit GIB’s links to the domestic economy. Given this and the Bank’s Saudi sovereign ownership, it is unlikely that any Bahraini transfer and convertibility restrictions (in case they were introduced) would impede GIB’s ability to meet its financial obligations. 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.

GIB’s BSR is derived from a CFS rating of ‘bbb-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb-’, which is higher than the OPERA of Bahrain (‘b+’) due to the Bank’s substantial exposure to assets (including self-funding subsidiaries) in highly rated countries notably KSA. OPERA is at a level indicative of modest risk. The OPERA balances the Saudi economy’s limited diversification, low monetary flexibility and geopolitical risks, against strong fiscal and external buffers, and substantial oil reserves. It also takes into account the Saudi banking sector’s strong capital buffers and a healthy funding structure, which primarily consists of domestic customer deposits with little dependence on cross-border funding.

The CFS rating reflects the Bank’s very strong liquidity underpinned by customer deposits (albeit wholesale funds) and term borrowings including access to debt capital markets, and the sound CAR and high CET 1 component alongside strong capital flexibility. The Bank’s geographically diversified asset base and sound loan asset quality are also rating supporting factors. The principal credit challenges are the business model dependence on wholesale banking and treasury, and the resultant high customer concentrations in the customer deposit base and loan portfolio. Other credit challenges are the low (albeit slowly improving) profitability at all levels and the ongoing regional geopolitical risks, with the risk factor being common to all GCC banks.

GIB management is conservative and follows a prudent credit and investment policy. This is clearly evidenced by the high proportion of liquid assets including HQLA and, conversely, the low share of net loans in total assets. However, as the business model remains heavily skewed towards wholesale banking and treasury, this effectively renders the balance sheet and revenue streams vulnerable to economic cycles. While the expanding Saudi subsidiary GIBSA has brought some degree of diversity to the balance sheet, keen competition for corporate and particularly retail business from the Saudi banks means that GIB continues to exhibit significant concentration risks. This is a credit challenge. Both GIBSA and GIBUK currently have a sound risk profile and are self-funded, sharply reducing any likelihood of needing parent liquidity or capital support.

Liquidity has been consistently very strong underscoring a conservative asset allocation policy. This factor, alongside the significant contribution from customer deposits to total funding, constitutes an important credit strength. The bulk of liquidity remains invested in HQLA, notably cash and central bank balances, as well as highly rated GCC investment securities (mostly ‘AAA’ to ‘A-’ paper). The latter, which are largely unencumbered and designated as a liquidity reserve, qualify as collateral for repurchase agreements and can be readily converted into cash as and when necessary. Crucially, utilisation of sensitive short-term interbank as well as repo funding has receded over the years, while more stable customer deposits and term debt have grown. However, a longstanding funding vulnerability remains the high concentration seen in customer deposits notably from GREs, a salient feature common to most (but not all) GCC banks. The potential liquidity and funding risk is mitigated by the large stock of liquid assets, combined with the historically stable nature of GRE deposits (notably PIF and other Saudi GREs). Refinancing risk is minimal. Debt has been continually competitively priced, reflecting the market’s perception of GIB being quasi-sovereign Saudi credit risk.

GIB’s well capitalised balance sheet and good quality capital is a credit strength. The high CET1 component provides a good buffer against unexpected net losses. Although CI considers the Bank’s propensity to generate internal capital as relatively low (despite recent improvements), overall capital flexibility is deemed strong given the capacity and demonstrated willingness of PIF to provide new capital as and when needed. At the current level, total CAR continues to provide adequate resources to support future business growth, particularly in KSA where GIBSA’s total CAR was 20.4% in Q1 24. As a result of strong customer deposit growth, GIB’s total equity funded a lower (but still satisfactory) 7.2% of the balance sheet in 2023.

While profitability at both the operating and net levels is still a credit challenge, the recent mild improvements seen is a positive development. We expect earnings to stabilise in the short term as the net interest margin (NIM) narrows in the face of an anticipated lower interest rate environment. The large stock of short-dated liquid assets (particularly bank placements) means that assets will likely reprice downward faster than customer deposits. GIB’s historically low operating and net profitability is in large part a function of the substantial volume of low-yielding HQLA, together with the dominance of wholesale banking. These factors, together with the concentrated business model, have restricted GIB’s ability to generate high levels of operating income. In turn, modest operating profitability restricts credit loss absorption capacity, although this risk factor is partially mitigated by a sound capital base. The quality and stability of GIB’s revenues is generally satisfactory, and cost efficiency improved further.

Despite an increase in NPLs in 2023 mainly due to a single corporate credit, GIB’s loan asset quality as measured by the low NPL ratio and good loan-loss reserve (LLR) coverage is a credit strength. The implementation of tighter lending criteria over time has benefited the credit portfolio, as has the establishment of an independent unit to manage distressed assets and enhance recoveries. This is partially evidence by the low level of <90 days past due not impaired (PDNI) loans, and the decline in Stage 2 loans (potential problem loans) to a very acceptable 3.5% of gross loans in 2023. Although these metrics partially reflect diminished credit stress, ongoing high borrower concentrations means latent credit risk is significant. This factor elevates the risk profile of GIB’s loan book. A partial risk mitigating factor in this regard is the low proportion of net loans in total assets coupled with a well-diversified credit portfolio by economic sector. Barring some external shock to the balance sheet, CI expects the magnitude of any potential NPL increase in the short term to be manageable.

Rating Outlook

The Stable Outlook for both the LT FCR and BSR reflects our expectation that the Bank’s liquidity, capitalisation and asset quality will remain strong over the next 12 months – despite ongoing profitability challenges. The Outlook also takes in our view that ownership by PIF will not change over this period.

Rating Dynamics: Upside Scenario

The BSR or its Outlook could be upgraded if there was a sustained improvement in GIB’s profitability metrics and so long as other key risk indicators remain sound.
 
Rating Dynamics: Downside Scenario

GIB’s FCRs or Outlook could be lowered if KSA’s sovereign ratings were downgraded. The BSR or Outlook could be lowered if there was a significant weakening of the Bank’s standalone risk profile as indicated by key financial metrics.

Contact

Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: ...
Secondary Analyst and Committee Chairperson: Rory Keelan, Senior Credit Analyst

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