Gulf International Bank faces $500m hit from US exposure

24 October 2008

Bank set to announce further debt provisions for investments in Lehman Brothers.

Gulf International Bank (GIB) is expected to announce further provisions relating to investments in the US, which sources close to the bank say could total up to $500m.

They are mainly related to fixed-income investments in Lehman Brothers, the US investment bank that filed for bankruptcy on 15 September. Sources say this exposure could be in the range of $100-500m.

“GIB has lost a big amount from investments in Lehman, up to $500m. It is set to lose a packet,” says one Bahrain-based banker who has worked with the bank on past deals.

Other sources put the figure much lower, at about $100m.

Yousuf Khan, analyst at ratings agency Fitch Ratings, says GIB’s exposure to Lehman is likely to emerge in its third-quarter results.

“We know that GIB has some Lehman exposure,” he says. “The bank has a large fixed-income portfolio and that is a big concern for the third quarter.”

He adds that GIB did not have any exposure to Fannie Mae or Freddie Mac, the US mortgage lenders that were taken over by the US government in September.

GIB is expected to announce its results for the three months to the end of September on 31 October.

The Bahrain-based bank, which was formed in 1975 during the oil boom, has already announced provisions of nearly $1bn from investments in assets affected by the sub-prime mortgage crisis, including structured investment vehicles and collateralised debt obligations.

This forced the bank to raise $1bn in capital from its shareholders: the six governments of the GCC and Saudi Arabia’s central bank, the Saudi Arabian Monetary Agency (Sama).

During this process, the governments of the UAE, Bahrain and Oman declined to give the bank fresh capital.

Qatar and Kuwait injected additional capital to maintain their overall shareholding of 12.1 per cent, but Saudi Arabia took up the rest of the capital offered to bring its total stake in the bank to 55 per cent, giving the Saudis majority control of the institution.

“GIB’s shareholders are getting increasingly frustrated with having to provide extra capital to cover up its losses,” one regional analyst tells MEED.

Despite the losses GIB has incurred, its primary business remains profitable. Fitch has rated the bank’s underlying activities at C/D but given an overall rating for the bank of A, which is based on the assumption of strong support from its shareholders.

“We have rated the bank’s stand-alone rating at C/D, which reflects concerns over the prospects for GIB, but for now it continues to have adequate profit from its core business,” says Khan. “It is just that losses elsewhere have so far outweighed them.”

GIB declined to comment on speculation about its exposure or the future of the bank.

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