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Limassol, March 22, 2023 — Moody’s Investors Service (“Moody’s”) has today affirmed Gulf International Bank BSC’s (GIB’s) long-term and short-term foreign currency deposit ratings at Baa1/P-2 and the foreign currency senior unsecured debt rating at Baa1. GIB’s Baseline Credit Assessment (BCA) and Adjusted BCA have been affirmed at ba2. At the same time, the foreign currency senior unsecured medium-term note (MTN) program and subordinated MTN program ratings have been affirmed at (P)Baa1 and (P)Baa3, respectively. Concurrently, Moody’s has also affirmed GIB’s long-term and short-term foreign currency Counterparty Risk Ratings at Baa1/P-2 and long-term and short-term Counterparty Risk Assessments at Baa1(cr)/P-2(cr), respectively.
The outlook on the bank’s foreign currency long-term deposit and senior unsecured debt ratings has been changed to positive from stable.
The rating action on the bank follows Moody’s decision to affirm Saudi Arabia’s government long-term issuer ratings at A1 and change their outlook to positive from stable on 17 March 2023. For further information on the sovereign rating action, please refer to Moody’s press release: https://ratings.moodys.com/ratings-news/400295.
RATINGS RATIONALE
RATIONALE FOR POSITIVE OUTLOOK
Moody’s positive outlook on GIB’s long-term senior unsecured debt and deposit ratings reflects the expectation of improving solvency following years of balance sheet clean-up efforts as well as supportive operating conditions in Saudi Arabia where bulk of GIB’s lending is conducted. The outlook also captures the positive outlook on the issuer rating of the Government of Saudi Arabia (A1, positive) – the bank’s largest shareholder and ultimate support provider – indicating potentially stronger capacity of the government to provide support in case of need.
RATIONALE FOR BCA AFFIRMATION
— FAVORABLE ASSET MIX DRIVES “STRONG-” MACRO PROFILE
Although GIB’s lending is concentrated in the Gulf Cooperation Council region – the bulk of it in Saudi Arabia (61.1% of total loans as of December 2022) – total net loans only represented around 35% of total assets over the same period while the rest of the bank’s asset base mainly comprises highly rated fixed-income securities from Europe, North America, and Asia. This compares to regional peers that typically hold around 70% of assets in the form of loans. With regards to the bank’s fixed income portfolio, Moody’s said that given its structure and duration profile, it expects that any unrealised losses are likely to be limited and manageable.
Moody’s therefore expects GIB’s asset quality to remain relatively resilient owing to the bank’s more conservative asset composition. Hence, in order to assess the bank’s operating environment and overall risk profile, we use a “Strong-” Macro Profile which is the weighted average of the Macro Profiles of the countries and/or regions in which the group holds assets. These notably include Saudi Arabia (“Moderate-“, 43% of total assets), Europe (“Strong”, 24%), North America (“Strong+”, 12%), United Arab Emirates (‘Strong-“, 7%) and Bahrain (“Weak+”, 6%).
— SIGNIFICANTLY REDUCING NON-PERFORMING LOANS
GIB’s stock of problem loans (NPL) has reduced to 1.6% of gross loans as of December 2022 (7.0% in 2018) after significant write-off efforts in recent years. More than 60% of GIB’s loans are in Saudi Arabia where the operating environment is supportive with sustained non-oil growth expected to be 3.5% in 2023, moderate domestic inflation and higher interest rates that will support Saudi banks’ net interest income. Additionally, the bank has taken steps to strengthen its risk underwriting standards since the new management took over in 2016, resulting in the substantial reduction in NPL stock (-28% CAGR since 2018). Over the next 12 to 18 months, Moody’s therefore expects no significant deterioration in asset quality.
— SOUND CORE CAPITAL
GIB has solid capital adequacy, with tangible common equity ratio (TCE) at 12.7% as of December 2022 (13.9% at December 2018) although down from 15% at December 2017. We still expect capital levels to remain sound. In addition, the bank has significant loss absorption capacity, with a provisioning coverage of existing non-performing loans at 138% as of YE2022. This also drove a reduction in the problem loans to loan loss reserves and shareholders’ equity ratio to 8% as of the same period, down from 25% in 2018. The group’s regulatory core capital on a consolidated basis was adequate for the level of risk the bank holds in its asset base with a reported common equity tier 1 ratio at 14.8% as of the December 2022.
— MODEST BUT IMPROVING PROFITABILITY
The bank’s internal capital generation remains modest. However, GIB returned to profitability in 2021 with a reported net income to tangible assets at 0.3% and 0.17% during 2022, after posting losses in prior years. This relatively low level of bottom-line profitability is driven by the bank’s asset split structure with lower yields from its sizeable placements and highly rated fixed income securities investments that significantly constrain – albeit improving – the bank’s margins (net interest margin at 1.0% as of December 2022) and earnings. Moody’s expects the bank’s profitability to improve further as the bank grows its lending book in Saudi Arabia where operating conditions are benign.
— CONCENTRATED DEPOSIT BASE MITIGATED BY HEALTHY LIQUIDITY BUFFER
GIB’s funding concentration presents risks as it is largely dependent on key depositors. The bank sources deposits mainly from companies and government related entities based in the region, resulting in high concentrations in its funding base, however this is a common structural feature among banks in the GCC. Moreover, these historically stable deposits are dominated by the government and its related entities, particularly in Saudi Arabia.
In addition to strong relationships with its large depositors, GIB’s large pool of liquid assets mitigates its funding concentration risk. GIB manages liquidity and funding risks in line with the Basel III liquidity framework and has reported an LCR at 299% and NSFR at 162% as of year-end 2022. As of December 2022, the bank maintained a robust liquid assets base (cash, other liquid assets, investments, and short-term interbank placements) that accounted for 58.3% of total tangible assets.
AFFIRMATION OF DEPOSIT AND SENIOR UNSECURED RATINGS
GIB’s Baa1 long-term foreign currency bank deposit and senior unsecured debt ratings incorporate four notches of government support reflecting our view of a very high probability of support from the Government of Saudi Arabia, the bank’s major shareholder which holds a 97.2% stake in the bank.
AFFIRMATION OF SUBORDINATED MTN PROGRAM RATING
GIB’s (P)Baa3 foreign currency subordinated MTN program rating incorporates three notches of government support, reflecting our view of a very high probability of support from the government. The lower notching for the subordinated debt reflects our view that the support provider may differentiate between senior and subordinated debt at times of stress despite our expectation of very high probability of support for both instruments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
GIB’s ratings can be upgraded as captured by the bank’s positive outlook in the event of (1) a higher Saudi Arabia Macro Profile capturing improved operating conditions for banks in Saudi Arabia; (2) stable asset quality; (3) significant improvement in profitability; (4) meaningful contribution of the retail business to profitability and funding; and/or (5) an upgrade of the Saudi government bond rating indicating a potentially greater capacity to extend financial support to the bank in case of need.
A downgrade on GIB’s ratings is limited given the positive outlook. However, the ratings outlook can be stabilized if (1) Saudi Arabia’s A1 sovereign rating outlook is stabilized; or (2) a deterioration materializes in the main markets where the bank operates leading to weakening solvency and liquidity.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The local market analyst for this rating is Badis Shubailat, +971 (423) 795-05.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.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
Nitish Bhojnagarwala
VP – Senior Credit Officer
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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