Since announcing nearly $1bn worth of provisions and a $757m loss for 2007, Gulf International Bank (GIB) has been in the news for all the wrong reasons. The bank’s exposure to sub-prime assets was the biggest in the region - twice the size of the exposure of its nearest rival, Arab Banking Corporation, another pan-Arab investment bank.

GIB must now try to fix the damage to its reputation caused by investments in sub-prime assets, and make a quick recovery in 2008, despite a market that shows signs of a slowdown and increasing competition from local and international banks. To do this, it will have to ensure it does not lose its position as one of the biggest regional investment banks, and that it can reward shareholder loyalty over the difficult past 12 months.

Structure

The bank was established in Bahrain in 1975 by the six GCC governments and the Saudi Arabian Monetary Agency (Sama), the Saudi central bank. The six governments each own 12.08 per cent of the bank, with Sama holding 27.5 per cent. Initially, the focus was on financing the development projects of the region and supporting economic development. As the 1970s oil boom ended, the bank turned its attention to international business.

In 2002, as a new oil boom facilitated massive investment projects in the region, the bank changed its strategy. This involved downsizing international offices in London and New York, and concentrating instead on expansion in the Middle East.

The result has been an increase in personnel in regional offices in Saudi Arabia and Bahrain, and a more prominent role among rival institutions in the region.

It also involved restructuring its management along client-focused lines rather than product-focused lines, to simplify the bank’s client relationships. The bank has given more responsibility to relationship managers to make them the main contact point for its services, rather than having several specialists competing for attention from the same client.

This has helped make GIB a major player in the regional market, with the remaining international offices operating as a useful conduit for syndicating Middle East deals in the capital markets of the developed world.

Operations

After retreating from international banking, and ending all non-relationship international lending after the introduction of the new strategy in 2002, GIB now focuses on its GCC-based clients. The bank operates in several key sectors, primarily project finance lending and advisory services, capital markets and investment banking.

Reflecting growth in the regional economies, net profit more than doubled between 2001 and 2006 to $255m, and the bank has been active in stripping out costs by consolidating back-office functions and bringing in new technology.

The introduction of a new method of evaluating revenue by clients, rather than by geographic location, also gives the bank the ability to assess its performance in terms of its success at selling clients a range of products, rather than just assessing the product lines. This has helped it set targets to drive the business forward and concentrate more on higher-yielding advisory work.

However, the sub-prime crisis has undoubtedly hurt the bank, and some rethinking of its investment strategy is due, despite the fact that all the investments were investment grade at the time.

Ambitions

GIB aims to be the biggest investment bank in the GCC. It continues to build on its reputation in the project finance sector by moving into more fee-based advisory activities, to balance interest-related income. These include seeking advisory mandates on flotations, asset management, financial restructurings, and mergers and acquisitions. The bank aims to capitalise on a client list that includes Saudi Basic
Industries Corporation (Sabic), Qatar Investment Authority, Qatar Telecom and Zain Group.

Competition will be intense as GIB competes with international banks, and the wealth of experience in these areas they already have, as well as local banks that are keen to expand and become regional champions.

A capital injection of $1.5bn and a new $1.2bn syndicated loan served to shore up the balance sheet following the sub-prime provisions, and should give GIB the ability to partici-pate in even bigger deals than before. The bank has also established a securities subsidiary in Saudi Arabia to capitalise on investment banking opportunities in the kingdom.