Gulf International Bank B.S.C.Gulf International Bank B.S.C.

GIBGIB

GIBGIB

Today's rating actions were prompted by GIBGIB's release of full-year results for 2007 and follow Moody's decision to change the outlook on the A2/Prime-1 deposit ratings and A3 subordinated debt rating to negative in December 2007. This reflected the rating agency's expectation that GIBGIB's exposure to assets related to US residential mortgage backed securities and to structured investment vehicles ("SIVs") would impact its earnings and solvency.

Moody's noted that GIBGIB has reported a net loss of US$757.6 million for 2007, following US$965.7 million in provisions taken against the bank's exposure to US residential mortgage backed security-related assets (primarily collateralised debt obligations -- CDOs) and SIVs. More specifically, GIBGIB took US$500.0 million in provisions against its US$581.8 million portfolio of SIVs, and another US$285.8 million in specific and general provisions against its US$1.04 billion portfolio of RMBS-related exposure, primarily CDOs. The remaining US$179.9 million of provisions taken in 2007 relate to specific and general provisions on other asset-backed securities ("ABS") and losses incurred on SIV exchanges (US$45.0 million). GIBGIB's 2007 losses are equivalent to more than two years' earnings.

Today's rating actions also take into account the decision by GIBGIB'sshareholders to inject US$1.0 billion in new equity, to shore up the bank's capitalisation. The equity injection which was committed in December 2007 is expected to take place in March 2008 and will result in the bank's Basel II Tier I ratio being above 11%.

Moody's said that in changing the outlook on the C- BFSR to negative, it had also moved the BFSR to the lower end of the C- category, mapping to a baseline credit assessment ("BCA") of Baa2.

The decision to move the BFSR lower down the C- category reflects Moody's reassessment of GIBGIB's intrinsic financial strength. On the one hand it recognises that: GIBGIB's core Gulf Cooperation Council ("GCC") merchant banking franchise and overall earning capacity remain largely intact, (ii) the valuation and provisioning of GIBGIB's sub-prime-related exposure and SIVs has been conservative, and (iii) short-term solvency pressure on GIBGIB is being relieved with the expected injection of US$1.0 billion in new equity from shareholders. On the other hand, the action also takes into account Moody's view that GIBGIB's international asset strategy is now less effective as a source of earnings diversification and as a tool for liquidity management.

GIBGIB has been maintaining a large portfolio of highly rated internationalsecurities, including a cross-section of ABS and financial institutions' securities. Within the context of the current sub-prime crisis, the risk-return and liquidity profiles of some of these asset categories are being reassessed by the market as a whole. Moody's in turn expects GIBGIB to restructure its securities holdings and funding profile over the medium term.

Moody's adds that the negative outlook on the C-BFSR reflects the possibility of further provisioning should the current credit squeeze intensify. The rating agency identifies the US$2.95 billion in outstanding ABS as the key factor likely to prompt future write-downs, although it recognises that this would only be triggered by a significant further deterioration in credit markets. The negative outlook also reflects the possible disruption to 'business as usual' as the bank closes its UK trading activities and deals with any asset or business restructuring over the coming months.

Moody's could downgrade GIBGIB's C- BFSR, if the bank's GCC merchant banking franchise were negatively affected by difficulties in other parts of the bank's business and/or if a possible worsening of the international credit environment were to lead to material new losses on the bank's international securities portfolio. Conversely evidence of continued strong performance in the bank's GCC business over the next 12-18 months could lead to the outlook on the BFSR being changed back to stable.

In affirming GIBGIB's A2 long term deposit ratings, Moody's recognises the very high likelihood of support from its shareholders (the Saudi Arabian Monetary Agency -- SAMA -- and the six GCC governments), most recently expressed in their decision to provide a US$1.0 billion recapitalisation for the bank. Given the Aa3 weighted average foreign currency bond rating of shareholders and GIBGIB's BCA of Baa2, the high likelihood of support leads to a three notch uplift to the deposit rating. The negative outlook on the deposit rating is now based on the negative outlook on the BFSR. A lower BFSR would likely lead to a downgrade of the bank's deposit ratings.

Gulf International Bank B.S.C.Gulf International Bank B.S.C. is headquartered in Manama, Bahrain, and at the end of December 2007 had total assets of US$29.95 billion.

-Ends-

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
George Chrysaphinis
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Copyright 2008, Moody's Investors Service, Inc. and/or its licensors and affiliates including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved.

© Press Release 2008

 

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