Moody's Investors Service ("Moody's") has
today assigned first time long and short-term deposit ratings of Baa1/P-2
for Gulf International Bank - Saudi Arabia (GIB KSA). At the same time,
the rating agency has assigned baseline credit assessment (BCA) and
adjusted BCA of ba3/ba2, long and short-term counterparty risk ratings of
Baa1/P-2 and long and short-term counterparty risk assessments of
Baa1(cr)/P-2(cr). The outlook assigned to the long-term deposit ratings
is stable.
GIB KSA was incorporated in April 2019 as a subsidiary of Gulf
International Bank BSC (GIB BSC) with a capital of SAR 7.5 billion (USD 2
billion) and was formerly structured as the Saudi branch of GIB BSC. Its
shareholders are GIB BSC and the Public Investment Fund (PIF, the
sovereign wealth fund of Saudi Arabia and holder of a 97% stake in GIB
BSC) who each injected USD 1 billion into GIB KSA's capital, resulting in
each having 50% ownership at inception. Following the incorporation of
GIB KSA, all the assets and liabilities of GIB BSC's branch operations in
KSA have been assumed by GIB KSA as have been the branches' old banking
and commercial licenses.
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
GIB KSA's Baa1 long-term deposit ratings take into consideration the
bank's ba2 adjusted BCA, which incorporates one notch uplift from the
bank's ba3 BCA based on Moody's assessment of a very high probability of
support from the parent, GIB BSC in Bahrain (Baa1 stable, ba2), as well
as four-notch uplift from government support from the bank's ba2 adjusted
BCA based on the agency's assessment of a very high probability of
support from the government of Saudi Arabia (A1 stable). The outlook
assigned to the Baa1 long-term deposit ratings is stable.
GIB KSA's deposit ratings are therefore positioned at the same level as
its parent. This reflects primarily Moody's expectation of very high
support from the government of Saudi Arabia, which controls both
entities, has been instrumental in establishing the structure of the GIB
group, and will remain a key driving force for the bank's strategy and
performance.
GIB KSA's ba3 BCA is primarily driven by the bank's strong
capitalisation, which offsets weak profitability and high level of
nonperforming loans. The bank also exhibits healthy liquidity buffers,
although with some depositor concentration.
RATIONALE FOR BCA
STRONG CAPITALISATION
GIB KSA's USD 2 billion capital injection ensures that the bank has strong
loss absorption capacity, with a tangible common equity ratio (TCE)
close to 27%. Moody's expects capital to be maintained at a strong level
despite the bank's planned high credit growth and still weak
profitability.
PROFITABILITY SET TO IMPROVE FOLLOWING PAST LOSSES
The bank's operations, under its former branch license, had been running
losses for several years due to high operating expenses and loan loss
charges caused by weak asset quality. Going forward, the agency, however,
expects GIB KSA to be marginally profitable and with potential to further
improve in this respect, as witnessed in H1 2019.
This view is supported by (1) the returns which can be achieved from the
USD 2 billion capital injection, which the bank did not have before
under the branch license, with this capital constituting close to 23% of
the total balance sheet at inception, (2) the development of retail
assets, with the bank having already incurred most of the necessary
development costs, while not yet generating significant income from this,
(3) a gradual increase in retail liabilities, which will improve the cost
of funds and ultimately translate into higher margins, and (4) lower
provisioning requirements following a significant improvement in loan
loss reserves to 82% in 2018 from 67% in 2017 as the bank took a one time
net charge of USD$ 273 million which resulted in a net loss close to USD
308 million in 2018.
HIGH LEVEL OF NONPERFORMING LOANS LARGELY RELATED TO LEGACY PORTFOLIO
The BCA also takes into account GIB KSA's high level of nonperforming
loans ratio of 11.2% as of March 2019 (when it was operating under
former branch license at the time) which compares unfavorably with KSA
average of 2%. The high nonperforming loans ratio is largely attributed
to the mid-size corporate segment which faced difficulties as a result of
a weaker operating environment in 2016 and 2017. This segment was part of
the target market of GIB KSA's parent, GIB BSC prior to 2016, but is no
longer a core part of its strategy. The bank has taken steps to
strengthen its risk underwriting standards since new management took over
in 2016, and this is evident in the low NPL formation of the new
portfolio. High borrower and sector concentrations, a common issue in the
Saudi banking system, makes the bank's asset quality vulnerable to event
risk.
AMPLE LIQUIDITY BUFFERS MITIGATE CONCENTRATED FUNDING BASE
GIB KSA's BCA also reflects funding concentration as it is largely
dependent on a limited number of key depositors. The bank sources
deposits mainly from Saudi corporates and government entities, resulting
in high concentrations in its funding base, which is common among banks
in the GCC region. GIB KSA's top 20 depositors constituted around 50% of
its total deposits in 2018, although this is down from more than 70% in
2016. However, this risk is largely mitigated by the fact that a large
portion of these funds are from government-related entities with which
GIB has strong relationships, owing to common ownership. Moody's expects
GIB KSA's reliance on market funding (around 23% as of March 2019) to
continue to decline, following the injection of the USD 2 billion capital
and also as the bank increases its retail deposit base.
The bank's large pool of liquid assets, which are largely in the form of
Saudi government securities and placements with Saudi Arabia Monetary
Authority and banks, also partly mitigates its funding risk. As of March
2019, GIB KSA maintained liquid assets which accounted for around 34% of
total tangible assets. The bank's liquidity buffers are sizeable and help
mitigate some of the risks attached to the depositor concentration.
AFFILIATE SUPPORT
GIB KSA's ba2 adjusted BCA takes into consideration the bank's ba3 BCA
and one notch of uplift based on Moody's assessment of very high
probability of support from its parent, GIB BSC. This reflects GIB BSC's
position as the parent of GIB KSA and likelihood that it would be first
in line to provide support if needed, as well as its capacity to provide
support.
RATIONALE FOR LONG TERM DEPOSIT RATINGS
GIB KSA's Baa1 long term ratings take into consideration the bank's ba2
adjusted BCA and four-notch of uplift based on Moody's assessment of very
high probability of Saudi government support.
This results in GIB KSA's deposit ratings being positioned at the same
level as those of its parent. This very high level of government support
reflects 1) the Saudi government's 97% ultimate ownership of the bank, 2)
the country's track record of support for the banking system, 3) the fact
that the Saudi government has been instrumental in establishing the
structure of the GIB group, and will remain a key driving force for the
bank's strategy and performance, and 4) Moody's expectation that the
Saudi government is unlikely to allow a situation to arise whereby
depositors in the GIB group's Saudi entity face higher expected losses
than depositors in its Bahrain based entity.
RATING OUTLOOK
The outlook assigned to the long-term deposit ratings is stable. The
outlook mirrors the outlook of the government of Saudi Arabia issuer
rating of A1 stable (the support provider). The stable outlook also
reflects the sound loss absorption capacity of GIB KSA with TCE ratio
close to 27% which balances the risks of high level of nonperforming
loans and weak profitability.
WHAT COULD MOVE THE RATINGS UP/DOWN
Positive pressure on GIB KSA's ratings could develop in the event of (1)
improvement in the bank's operating environment leading to a higher macro
profile, (2) significant and sustained improvement in the bank's
profitability, (3) significant and sustained improvement in the bank's
asset quality accompanied with lower sector and borrower concentrations,
or (4) significant improvement in the banks funding base leading to much
lower concentration risk.
Downward pressure on GIB KSA's ratings could develop following (1) a
downgrade of the Saudi government rating, which would indicate a reduced
support capacity, (2) potential reassessment by Moody's of the
government's willingness to support, or (3) deterioration in the bank's
operating environment, resulting in weakening solvency and liquidity.
FULL LIST OF ALL AFFECTED RATINGS
Issuer: Gulf International Bank -- Saudi Arabia
..Assignments:
.... Adjusted Baseline Credit Assessment, assigned ba2
.... Baseline Credit Assessment, assigned ba3
.... Long-term Counterparty Risk Assessment, assigned Baa1(cr)
.... Short-term Counterparty Risk Assessment, assigned P-2(cr)
.... Long-term Counterparty Risk Ratings, assigned Baa1
.... Short-term Counterparty Risk Ratings, assigned P-2
.....Long-term Bank Deposits, assigned Baa1, Stable Outlook Assigned
.... Short-term Bank Deposits, assigned P-2
..Outlook Action:
....Stable Outlook Assigned
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The local market analyst for this rating is Ashraf Madani, +971 (423)
795-42.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of debt or
security this announcement provides certain regulatory disclosures in
relation to each rating of a subsequently issued bond or note of the same
series, category/class of debt, security or pursuant to a program for
which the ratings are derived exclusively from existing ratings in
accordance with Moody's rating practices. For ratings issued on a support
provider, this announcement provides certain regulatory disclosures in
relation to the credit rating action on the support provider and in
relation to each particular credit rating action for securities that
derive their credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and in
relation to a definitive rating that may be assigned subsequent to the
final issuance of the debt, in each case where the transaction structure
and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action, and
whose ratings may change as a result of this credit rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures, if
applicable to jurisdiction: Ancillary Services, Disclosure to rated
entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Christos Theofilou, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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