Global Arab Network - Capital Intelligence (CI) had announced that it has affirmed Bahrain-based AlBaraka Islamic Bank (AIB)’s Long and Short-Term Foreign Currency ratings at BB+ and A3 respectively.

 These ratings incorporate a one-notch uplift on the basis of AlBaraka Banking Group (ABG) ownership, the parent.  Accordingly, the Support Level is affirmed at 2.  The Bank’s Financial Strength Rating (FSR), affirmed at BB, is supported by its comfortable liquidity and high capital adequacy ratio.  Rating constraints remain its small asset size, concentration risks, heightened credit risk in Bahrain and increased exposure to Pakistan, a high NPF ratio and weak profitability.  The outlook for all ratings is ‘Stable’.

AIB is one of a number of Islamic banking subsidiaries belonging to the Saudi-owned Bahrain based ABG.  Although still a small bank by all measures, AIB now claims a significant market share of Islamic banking assets in Pakistan through its recent acquisition in that country.  Non-performing financings (NPFs) increased in 2010 mainly due to accounts inherited with the acquisition.  While the expanded Pakistan operation exposes AIB to a higher degree of sovereign risk and an ongoing challenging operating environment, it is noteworthy that a disproportionate share of non-performing financings (NPFs) has historically derived from Bahrain.  Encouragingly, NPFs have started to decline in the first quarter of the current year.  The ratio of financing-loss reserves to NPFs also improved albeit coverage continues to be comparatively low.  Although net profitability returned to positive territory aided by a non-recurring gain together with a sharp reduction in impairment provisions, AIB’s performance at the operating and net profit levels remained weak reflecting relatively low levels of income generation. 

Liquidity and capital adequacy remain AIB’s relative strengths.  The ongoing cautious financing policy has contributed to a year-on-year rise in liquidity, the latter which rests on customer deposit funding.   The balance sheet is well capitalised supported by a policy of full profit retention, although free capital is rather strained by unprovided NPFs.  Despite AIB’s efforts to diversify assets and funding there remained concentrations within its balance sheet. 

Incorporated in Bahrain in 1984, AIB operates as a retail bank under a license granted by the Central Bank of Bahrain (CBB).  AIB is a 91.1% owned subsidiary of ABG.  ABG is majority owned by Shaikh Saleh Abdulla Kamel in Saudi Arabia and Dallah Al Baraka Holding Company (E.C.).  The latter is a subsidiary of the Jeddah-based conglomerate Dallah Al-Baraka Group, one of the top five Saudi companies.  The principal activities of AIB include the provision of demand and investment accounts and finance and investment on the basis of Murabaha, Mudaraba, Musharaka and Ijara.  The Bank operates through 89 commercial banking branches in Pakistan, situated in the major cities.  In Bahrain, banking operations are conducted from the head office and 5 branches.  Total assets at end 2010 were USD1,347mn and total capital USD184mn.