Global Arab Network | Bahrain-based BBK - Significant domestic franchise and sufficient capitalisation

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Bahrain-based BBK - Significant domestic franchise and sufficient capitalisation

Global Arab Network - - Mohammed Almasri

Monday, 01 February 2010 16:39

Fitch Ratings has today affirmed Bahrain-based BBK's Individual Rating of 'C/D' and removed it from Rating Watch Negative (RWN). Fitch has simultaneously affirmed the bank's Long-term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook, Short-term IDR at 'F2', Support Rating at '1' and Support Rating Floor at 'A-'.

The affirmation of BBK's Individual Rating reflects its significant domestic franchise and sufficient capitalisation. It also reflects rising loan impairment charges, as well as BBK's reliance on a small and increasingly competitive domestic market. The bank's IDRs and Support Rating reflect Fitch's view that there is an extremely high probability that the bank would receive support from the Bahraini authorities, if required, given its importance to the banking system and its 32% ownership by the government.

BBK's 9M09 operating profits improved 45% y-o-y, as the bank did not suffer further significant impairment charges for investments, which had negatively affected profitability in 2007 and 2008. Pre-impairment operating profits were nevertheless lower, mainly due to lower one-off gains on the sale of equity investments. The bank's net interest margin improved, as BBK, taking advantage of lower market values, benefited from gains on the repurchase of part of its subordinated debt. However, overall lower revenues, combined with expenses relating to certain strategic initiatives, had a negative impact on the cost/income ratio, which rose to 46.7% in 9M09 compared with 32.3% for end-2008. Preliminary figures for the full year 2009 reveal that the bank achieved net income of BHD35m (2008: BHD27m), an increase of 29%.

BBK's asset quality worsened in 9M09, with a non-performing loan ratio of 7% (end-2008: 4.4%), while loan loss coverage declined to 52.2% (end-2008: 74.8%). However, to a large extent, the increase in NPLs relates to international exposures and Fitch understands that many NPLs are being restructured, are well-collateralised and being serviced by borrowers. Around one-quarter of the loan book relates to real estate and construction lending, whilst non-performing loans to date mainly relate to non-bank financial institutions and the manufacturing sectors. Credit risk may also arise on the bank's book of credit default swaps, written mainly on highly-rated GCC and Indian entities. However, BBK is reducing its exposure to these products.

BBK's funding is mainly from customer deposits, plus some longer term funding, principally a USD500m senior debt issue due in 2011 (rated 'A-') and around USD200m of subordinated debt due in 2017 (rated 'BBB+'). The bank is typically a net placer in the interbank market. At end-9M09, the loan/deposit ratio stood at around 110%, but further growth in customer deposits in Q409 has reduced the ratio to more comfortable levels, while the loan book has declined slightly. Capitalisation is adequate, with a Fitch eligible capital ratio of 13.7% at end-9M09. BBK's tier 1 and total capital ratios under Basel II were 14% and 18.7% at end-9M09 respectively.

BBK offers retail and commercial banking through 17 domestic branches and has a presence in Kuwait, India and Dubai. Its largest shareholder is the government of Bahrain (32%), followed by Ithmaar Bank (25%), a Bahraini investment bank. BBK has the second-largest domestic market share in Bahrain and its strategy is to further expand its retail focus. CrediMax, a wholly-owned subsidiary, dominates the Bahraini credit card market.

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.

Global Arab Network

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