Gulf International Bank B.S.C. Reports Third Quarter Profit

12 November 2009

Gulf International Bank B.S.C. (GIB) reported consolidated operating income of $133.0 million for the nine months ended 30th September 2009 compared to $166.1 million in the comparable prior year period. Total income of $225.8 million was 19 per cent lower than in the prior year period while total expenses at $92.8 million were 17 per cent down on the prior year. Within operating income, there was a significant year-on-year improvement in trading income resulting from the elimination of trading losses incurred in the prior year period following the termination of proprietary trading activities in 2008. A year-on-year decrease in net interest income was attributable to the deleveraging of the balance sheet in the current challenging market and economic environment and the negative impact on interest earnings of the historically low interest rate environment. Market conditions also contributed to lower fee-related income. A $19.2 million or 17 per cent year-on-year decrease in total expenses reflected the implementation of effective measures to align the cost base with the bank’s current operating model, and further improvements in operational efficiencies.

In keeping with GIB’s traditional conservative approach to provisioning, the Bank continued to make significant additions to both its specific and non-specific loan provisions in the third quarter. In view of the prevailing economic conditions, the Bank increased its non-specific loan provisions so as to maintain provisions at a level consistent with the historical highest ever corporate default rates. As a result, the non-specific loan provision was increased by $53.0 million in the first nine months of the year to $233.0 million at the third quarter end. As a result, total loan provisions were 1.5 times the level of unsecured non-performing loan exposure, thereby providing a significant buffer in the current challenging environment. The net provision charge for the nine months for both loans and securities amounted to $152.4 million. After taking account of the exceptional provision charge, the Bank recorded a net loss of $20.2 million for first nine months. A net profit of $2.3 million was recorded in the third quarter after a net provision charge of $41.6 million, compared to a $220.7 million net loss in the prior year period.

Consolidated total assets at the quarter end were $17.0 billion. An $8.1 billion decrease in total assets during the first nine months of the year reflected the sale of $4.8 billion of securities in March as well as a 23 per cent reduction in the loan portfolio resulting from actions taken to reduce leverage in the current uncertain environment. Loans and advances were $10.0 billion at the end of September, being $2.9 billion down on the 2008 year end level. A particularly cautious approach has been adopted towards new lending activities in the current market conditions. The Bank is also maintaining a high level of liquid assets as a precautionary measure. Placements with banks, and cash and other liquid assets amounted to $4.5 billion at the quarter end, representing 26 per cent of total assets. In addition, investment securities, which largely comprised highly rated and liquid debt securities issued by major financial institutions and government-related entities, amounted to $2.0 billion. The surplus liquidity generated from the securities sale and reduction in the loan portfolio during the nine months was utilised to reduce the bank’s funding requirements. At the quarter end, customer deposits represented 80 per cent of total deposits. Customer deposits principally comprise deposits from governments, central banks and government-related institutions. The Bank is a net placer of funds in the interbank market. During the third quarter, the Bank raised $350 million of new term finance, increasing medium and long term funding to $3.0 billion, or 20% of total liabilities. The Bank is continuing to lengthen the maturity profile of its liabilities in order to strengthen its funding base and is taking pro-active action to raise additional term finance in the fourth quarter of the year, including the recently concluded groundbreaking Saudi Riyal 2 billion 3-year bond issue. The Basel 2 total and tier 1 capital adequacy ratios at 30th September 2009 were a strong 21.6 per cent and 16.0 per cent respectively.

Gulf International Bank (GIB) is a leading merchant bank in the Middle East with its principal focus on the Gulf Cooperation Council (GCC) states. The Bank is 97.2 per cent owned by the Government of Saudi Arabia. In addition to its main subsidiary Gulf International Bank (UK) Ltd., the Bank has branches in London, New York, Riyadh and Jeddah, in addition to representative offices in Beirut and Abu Dhabi.