At their meeting on Friday, 13th February 2015, the Board of Directors of Gulf International Bank B.S.C. (GIB or the Bank) approved the consolidated financial statements for the year ended 31st December 2014.

GIB recorded consolidated net income after tax of $85.6 million for the year ended 31st December 2014, compared to $121.5 million in the prior year. However, prior year income included two exceptional, one-off income items amounting to $21.2 million. Excluding these exceptional income items, net income was $14.7 million lower than the prior year principally due to a $13.3 million year-on-year increase in operating expenses. The increase in expenses was attributable to the investment in the implementation of the new GCC-focused universal banking strategy and, in particular, the new retail bank which was launched for customers in the Kingdom of Saudi Arabia under the brand name ‘meemم’ in January 2015. Net income after tax in the fourth quarter was $12.9 million compared to $20.0 million in the fourth quarter of 2013.

Total income at $257.6 million was $20.7 million or 7 per cent lower than the prior year. Excluding the exceptional income referred to above, total income was marginally up on the prior year reflecting a strong level of net interest income and higher contributions from fee and commission income, and foreign exchange income. The notable increases in the strategically important fee and commission income, and foreign exchange income reflected continued success in the cross-sell of non-asset based products and services to the Bank’s customers.

Net interest income, which at $158.0 million represented the Bank’s largest income source, was $5.1 million or 3 per cent down on the prior year. The year-on-year decrease was principally attributable to higher costs associated with balance sheet management initiatives that form part of an on-going programme to minimise the mismatch between the maturities of assets and liabilities. In this context, in May 2014, GIB issued a Saudi Riyal 2.0 billion five year floating rate note to investors in the Kingdom of Saudi Arabia at a highly optimal spread of 72.5 basis points above SAIBOR. Net interest income derived from the wholesale corporate lending activity increased by 4 per cent over the prior year. The year-on-year increase reflected a further increase in the average loan volume as the Bank successfully reorientates its lending activities from transactional-based long-term project and structured finance to relationship-based large and mid-cap corporates. This resulted in a 4 per cent year-on-year increase in the average loan volume as well as increased non-asset based customer-related activities. Fee and commission income at $62.9 million was $0.9 million up on the prior year, and comprised almost one quarter of total income. This further growth in fee and commission income reflects the success that has been achieved in the implementation of GIB’s new strategic focus on non-asset based, relationship-orientated products and services, and on supporting customers’ commercial and trade finance requirements. Foreign exchange income at $19.4 million was $2.0 million or 11 per cent up on the prior year. Foreign exchange income principally comprised customer-related foreign exchange revenue, and in particular revenue derived from structured products designed to assist customers in hedging their foreign exchange exposures in the current volatile markets. Trading income at $2.4 million compared to a $9.3 million profit in the prior year. However, prior year trading income included an exceptional $5.9 million fair value gain on a fund investment arising on the fund’s recovery of a previously written off investment. Trading income principally comprised gains on an investment in a fund managed by the Bank’s London-based subsidiary, GIB (UK) Limited. Other income of $14.9 million for the year compared to $26.5 million in the prior year. However, prior year other income included an exceptional $15.3 million recovery arising on the liquidation of a structured investment vehicle that had been written off in 2007. The remaining other income principally comprised dividends on equity investments.

Total expenses at $164.9 million for the year were 9 per cent up on the prior year. The year-on-year increase in expenses was attributable to the on-going investment in the implementation of GIB’s new GCC-focused universal banking strategy. GIB’s Chairman H.E. Jammaz bin Abdullah Al-Suhaimi, commented “I am pleased to report that we made excellent progress during the year in implementing our business strategy to transform GIB into a leading pan-GCC universal bank providing innovative customer-centric solutions.”

H.E. Al-Suhaimi continued “The key strategic highlight of 2014 was undoubtedly the highly-successful soft launch of GIB’s unique technology-based retail bank in Saudi Arabia under the brand ‘meemم’. This heralds the achievement of a key milestone in the Bank’s strategic direction and marks the beginning of the ‘new GIB’. The launch was slightly later than expected due to the sheer complexity of the project, for which planning started three years ago. Supporting the launch was the design of the ‘meemم’ brand; the recruitment and training of over 200 staff; the completion of three unique provincial retail ‘stores’ and nine ‘mini-stores’; and the go-live of the first phase of a highly-sophisticated proprietary greenfield IT infrastructure. New innovative liability products and services such as an integrated current and savings account, time deposits, a multi-currency debit card, and bills payment, were launched in 2014. Asset products, including credit cards and personal loans, will follow in 2015, supported by phase two of the new IT infrastructure. GIB’s pioneering online retail banking model is unique to the Middle East. It is targeted at people who trust, and are comfortable with, technology; and are accustomed to conducting their various daily transactions online. State-of-the-art technology will play a critical role in delivering superior customer service and exceptional value for money.”

H.E. Al-Suhaimi concluded “Based on our significant achievements in 2014, we are optimistic about GIB’s prospects for next year. We have put in place solid foundations through which to support our strategic objectives to grow and develop the business across the GCC region. GIB is strongly positioned to face all future challenges, and the Board has every confidence in the Bank’s management to continue implementing our new strategy and achieve our ambitious business goals.” Dr. Yahya bin Abdullah Alyahya, GIB’s Chief Executive Officer stated “As we predicted last year, the dilution of profitability in 2014 arises from the substantial investment in establishing a new retail bank as part of our pan-GCC universal banking strategy, and will continue through to the expected break-even of the retail bank in 2018. In addition, the Bank’s initiatives to minimise the mismatch in the asset and liability maturity profile, and proactive preparations for future growth in the core corporate loan portfolio resulted in the raising of additional term finance during 2014, which has had an impact on profitability in the short-term. However, term finance will no longer be required once more stable funding is provided by retail deposits generated by the new retail bank, thereby contributing to an improvement in profitability in the medium- to long-term.”

Dr. Alyahya continued “During 2014, all international rating agencies endorsed their confidence in GIB’s financial strength. By way of example, Fitch Ratings affirmed GIB’s long-term issuer default rating (IDR) at ‘A’ with a stable outlook, and its viability rating (VR) at ‘bbb-‘. The viability rating, representing Fitch’s assessment of GIB on a standalone basis without shareholder support, reflects the Bank’s improved financial metrics, particularly its strong liquidity and capital position. The agency noted that GIB has significantly strengthened its funding profile, including raising stable customer deposits, and improving the term structure of wholesale funding. We regard this as an independent validation of the actions we have taken over the past four years to restructure the Bank, along with the implementation of our new business strategy. Further recognition of our business achievements was highlighted in the form of additional industry awards during 2014. GIB was named ‘Best Investment Bank in Bahrain and the Middle East’ and ‘Safest Bank in Bahrain’ by the Global Finance Awards; and ‘Best Investment Bank in the Middle East’ and ‘Best Investment Bank in Bahrain’ by the Global Banking & Finance Review Awards. In addition, GIB won the ‘Islamic Investment Institution of the Year’ award at the 10th annual World Islamic Funds & Financial Markets Conference.”

Dr. Alyahya also highlighted “The Bank’s Basel 2 total and tier 1 capital adequacy ratios at 31st December 2014 were 19.6 per cent and 18.1 per cent respectively. These are both exceptionally high by international comparison. With these strong capital ratios and as a result of the actions taken to strengthen the Bank’s liquidity position, GIB is already in compliance with almost all of the Basel Committee’s Basel 3 guidelines that are planned to be implemented over the next few years.” Consolidated total assets at 31st December 2014 were $21.3 billion. The asset profile at the 2014 year end reflected a high level of liquidity that is being maintained as a precautionary measure in the prevailing uncertain and volatile market environment. Placements and liquid assets amounted to $9.0 billion at the year end, representing a very high 42 per cent of total assets. In addition, investment securities, which principally comprise highly rated and liquid debt securities issued by major financial institutions and regional government-related entities, amounted to $3.9 billion. Loans and advances amounted to $7.9 billion, being $0.4 billion lower than the 2013 year end level reflecting the run-off of legacy non-core loans. The loans to equity ratio was a conservative 3.4 times, while the ratio of loans to customer deposits and senior term finance was a prudent 49 per cent. At the end of 2014, customer deposits, represented 91 per cent of total deposits. Importantly, interbank placements significantly exceed bank deposits, and as a result the Bank is a net placer of funds in the interbank market.