Fitch Ratings has affirmed Bahrain-based BBK’s long-term issuer default rating (IDR) at ‘BBB-‘ with a stable outlook, short-term IDR at ‘F3’, viability rating (VR) at ‘bb+’, support rating at ‘2’ and support rating floor at ‘BBB-‘.
BBK’s IDRs and support rating reflect Fitch’s view of a high probability of support from the Bahraini authorities if required, given its importance to the banking system and its 32% ownership by the government. IDRs are, therefore, sensitive to any change in the creditworthiness of the sovereign or Bahrain’s propensity to support BBK. The stable outlook reflects the outlook on Bahrain’s sovereign ratings.
In Fitch’s view, the high probability of support from Bahrain would extend to subordinated debt. Therefore, the subordinated debt rating is notched off BBK’s long-term IDR rather than the typical notching from the VR applied in countries outside the region.
BBK’s domestic franchise generates multiple earnings streams, but operating profitability remains modest. This constrains BBK’s VR, particularly as it provides limited loss absorption capacity at a time when impairment charges are running at a high level and there is a risk, although not Fitch’s base case, that social unrest could worsen and impact the real economy. BBK is seeking to mitigate the pressure on its core earnings through diversification strategies, which Fitch views as positive but unlikely to significantly benefit the bank in the near term.
Loan growth increased in H211 on the back of the government’s economic stimulus, which together with a strong deposit increase has led to net interest income rising, while the margin remained flat at 2.7%. BBK has little flexibility to rein in costs due to its expansion focus.
Fitch expects that asset quality may deteriorate further after BBK’s non-performing loans (NPLs) and restructured loans both rose moderately in 2011 due to the disruption to the economy and the weakened private sector. Its NPL ratio of 9.1% at end-2011 is high by regional standards, although adequate reserve and collateral coverage are beneficial to the VR. High loan concentration by sector (particularly to real estate) and borrower pose additional challenges to asset quality.
Fitch considers BBK’s funding and liquidity as strong overall. BBK’s funding is mainly sourced from customer deposits reflecting its position as a major Bahraini bank. Deposits grew by a significant 30% partly due to a ‘flight to quality’ following the unrest in H111 with both domestic retail and institutional deposits up yoy. Its largest depositors include the governments of Bahrain and Kuwait, owing to its strong ownership factors. These deposits are considered stable by management and have proven to be so over time. BBK’s funding mix is fairly diverse, including inter-bank deposits and term funding. Balance sheet liquidity is healthy, supported by government bond holdings and with a Fitch calculated gross loans/deposit ratio of 73% at end-2011.
BBK’s Fitch core capital ratio declined to 13% at end-2011 (2010: 14.4%), demonstrating that modest profitability is not supporting loan growth. Given the moderate potential for weakened asset quality during a mild stress because of its loan exposure to the real economy, Fitch considers capitalisation to be adequate but not strong and BBK’s VR could face downward pressure if the ratio declines further.
BBK offers retail and commercial banking through a wide domestic network and has a presence in Kuwait, India and Dubai. Bahrain’s 32.1% stake is held through the state social insurance and pension fund organisations. Kuwait holds 18.7% through the Kuwait Investment Authority. BBK has the second-largest domestic market share in Bahrain and its strategy is to further expand retail banking and financial services in Bahrain as well as increasing corporate banking regionally and in India.