The start of the decade was a bleak time for Gulf International Bank (GIB). The bank was struggling under the heavy burden of non-performing developing country debt, two years of losses in 1989 and 1990 had wiped out the bank’s capital and two of its shareholders were at war. And when the help arrived, in the form of Gulf Investment Corporation (GIC), it seemed that GIB might pay the price by being subsumed into a larger regional investment vehicle.
But five years is a long time in the world of finance. In 1995, GIB is on target for a fifth consecutive year of healthy profits, the balance sheet is showing steady growth and management has found a new regional focus. ‘We are a long-term player,’ says Mohannad Farouky, assistant general- manager, with a confidence that would have been hard to muster just a few years ago.
History and structure: GIB was founded in 1976 with seven shareholders, the six states of the GCC and Iraq. Its headquarters were established in Bahrain and it built up a network of international branches and representative offices, including London, New York, Singapore, Tokyo and Frankfurt. Flush with petro-dollars, the bank made an ill-fated move into the lesser developed country debt market. With that market turning sour in the 1980s, the bank reported combined losses for the period 1989-1990 of more than $1,000 million and had to be recapitalised. A change of the shareholding structure also became inevitable when Iraq invaded Kuwait in 1990.
GIB was saved by an injection in April 1991 of $450 million from GIC, the Kuwait-based and GCC-owned bank. All the shares held before the GIC injection were eliminated, and GIB became a wholly-owned subsidiary of GIC. Since then there has been a steady drive to develop two distinct, but complementary institutions. ‘There is a clear and definite division of function,’ says Farouky. ‘The capital markets side is handled by our parent and we handle the commercial banking side.’
Since 1991 GIB has rationalised its international operations in a way that reflects the shift towards a regional focus. The Tokyo and Frankfurt offices were closed in January 1991 and the Singapore branch was scaled down to a representative office. The bank has maintained its London and New York branches, a representative office in Abu Dhabi and an affiliate bank, as well as a subsidiary in Oman. In June 1995, GIB opened a representative office in Lebanon.
General manager Ghazi Abdul-Jawad has presided over a decade of change at GIB, since joining the bank in 1985. Abdul-Jawad came to GIB from Saudi Investment Bank and was previously in the Saudi Arabian diplomatic service.
Farouky, who joined the bank in 1987, was appointed assistant general- manager of banking in 1994. He joined the bank after previous experience with Chase, ALUBAF Arab International Bank and Citibank. He works alongside David Gates, assistant general-manager of assets and liabilities, who joined the bank in 1991. Gates was previously general manager at Continental Capital Markets in London.
The number of bank staff has remained remarkably stable over the past five years of restructuring, falling from 286 in 1990 to 276 in 1995.
Strategy: ‘We have refocused on the Gulf and the Middle East, where previously we had been expanding in Europe, America, Latin America, Africa and the Far East,’ says Farouky. Before 1991, about 25 per cent of the bank’s business came from the Middle East; now that figure has risen to about 30 per cent. ‘I think that is the right level,’ says Farouky, as the bank is still keen to keep a diversified portfolio.
One area of the business where GIB is finding more opportunities in the region is corporate finance. ‘We have been building our corporate banking quite substantially over the past four years, and that has really started to pay out handsomely,’ says Farouky. This includes developing the bank’s project finance capabilities and its relations with the top 50 corporates in Saudi Arabia and the top five-six companies in each of the other GCC states.
Yet, this is also an area where GIB faces stiff competition from international banks. Says Farouky, ‘The Gulf, unfortunately for us but fortunately for some other banks, is one of the rare areas which can offer very attractive yields to banks.’ GIB cannot expect to match the resources at the disposal of some of its bigger international rivals but believes it can better them with unrivalled regional experience. ‘The value added is our ability to judge the market, to know the client and to distribute within the region,’ he says.
The treasury is another core business. ‘The department has always been a large and important part of GIB,’ explains Farouky. The bank offers a variety of products to its customers, including a range of derivative structured products, although GIB is not involved in building up its own positions. ‘We are a very conservative bank and target our products in response to client’s needs.’
Developing new products also involves increasing GIB’s Islamic banking capabilities. GIB has a team of Islamic experts structuring products in accordance with Sharia law. Although most business is focused on short- term financing, Farouky says demand for more medium-term financing of Islamic products is growing.
But GIB has not attempted to match the skills of its international rivals in every sector. ‘One obvious area, where for a long time we have decided we would not compete, is private banking,’ says Farouky. Competition for this business is intense from international banks that are able to offer a product range that GIB cannot hope to rival.
Performance: GIB has reported a steady improvement in profits since 1991. The exception in the five-year run is 1994, when the bank reported a drop of 15 per cent to $75 million, as earnings were hit by the downturn in the world bond and securities market. The bank’s first half results for 1995 suggest profits are now back on track with a 13 per cent increase in earnings to $43 million, compared with the same period last year. ‘So far in 1995 we are well above budget,’ says Farouky. ‘So it looks like 1995 will be better than 1994 and could match 1993, although you never know in banking.’
Asset growth has also been steady. In 1991, the balance sheet was cut by more than 40 per cent from its 1989 figure of almost $10,000 million. At the end of June 1995, GIB reported assets of $7,697 million.
One of the challenges is to ensure the bank is able to cope with the sharp fluctuations in the performance of Gulf economies, particularly as most institutional and corporate depositors prefer to hold their funds with the bank on a short-term basis. ‘Balancing our liabilities maturity profile is going to be very important for us in the next five years,’ says Farouky. As a first step, Commerzbank was mandated in September to arrange GIB’s first syndicated term-loan facility, to raise about $200 million. The loan was heavily oversubscribed and the syndication was signed in November at $300 million.
Outlook: GIB has had to live with many changes in its first 20 years, but it has shown an ability to adapt and develop new strategies to deal with changing times. The present focus on the Middle East and the growing financing needs of local business and industry should ensure a steady stream of opportunities for the foreseeable future. The challenge will be for GIB to capitalise on its already close links with the local corporate clients and to keep international rivals, with their greater size and resources, at bay.