|03 September, 2019

Moody's assigns first time ratings for Gulf International Bank - Saudi Arabia

The outlook assigned to the long-term deposit ratings is stable

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

-Ends-

© Press Release 2019

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