“NBB’s VR and IDRs reflect its leading domestic franchise, consistent profitability, generally healthy asset quality, sound liquidity and very strong capitalisation. They also consider the bank’s high reliance on a relatively small and competitive domestic environment, and concentrations in loans and deposits,” Fitch in a statement said.
“NBB’s operating profit increased by 4.2% in 2012, driven by strong revenue growth and expense management. The net interest margin was little changed at 2.8% in 2012, mainly driven by higher interest income on NBB’s securities portfolio. Cost efficiency improved with the cost/income ratio falling to 31.5%. Loan impairment charges trebled to BHD9.2m, but still only represented 15.5% of pre-impairment operating profit. Fitch expects profitability to further improve in 2013, driven by selective loan growth supported by its investment securities portfolio,” it added.
“Impaired loans increased to 7.6% of total gross loans at end-2012 (end-2011: 1.8%), largely as a result of the impairment of one large real estate-related exposure. Fitch does not expect NBB to suffer significant losses, if any, as this exposure is well-collateralised. Asset quality otherwise remained healthy, benefiting from significant exposures to the government and large domestic corporates. Despite the increased loan impairment charge, loan loss reserve coverage declined to around 40% (end-2011: 104%).”
“Funding is mainly from customer deposits (almost 90% of non-equity funding), reflecting NBB’s strong domestic franchise. Customer deposits have been increasing in recent years (2012: up 9%), following successful initiatives to attract deposits. NBB is a net placer of funds into the interbank market.
“Loans/assets (end-2012: 33.5%) and loans/customer deposits ratios (44.1%) are low by regional standards. NBB has substantial liquid assets on its balance sheet, consisting of cash, interbank placements, treasury bills and other investments, which together represent around 65% of total assets.
“At end-2012 the bank’s regulatory Tier 1 and Fitch core capital ratios further strengthened to 25.8% and 30.2% respectively, boosted by retained earnings and slightly lower risk-weighted assets.
The bank’s VR is sensitive to deterioration in the local operating environment (in particular escalation of the unrest that commenced in early 2011) or any further deterioration in the bank’s asset quality. Upside potential is currently limited. A downgrade of the Bahraini sovereign rating (‘BBB’/Stable) would probably also lead to a downgrade of the bank’s VR and IDRs, considering the bank’s significant exposure to the Bahraini sovereign and the domestic environment.
NBB’s support rating and support rating floor reflect Fitch’s view that there is a high probability that the bank would receive support from the Bahraini state, if required. This view is based on the Bahraini authorities’ track record of support for domestic banks, the bank’s leading franchise in Bahrain and its majority government ownership.
The bank’s Support Rating and Support Rating Floor are sensitive to any change in the Bahraini sovereign rating, which would have an impact on the bank’s Support Rating Floor and therefore the bank’s Long-term IDR. However, a change in the sovereign rating is unlikely at present, as reflected in its stable outlook. The ratings would also be sensitive to any change in Fitch’s view of the authorities’ propensity to support the bank, which is similarly unlikely at the present time.
Incorporated in 1957, NBB is a full service retail and commercial bank based in the Kingdom of Bahrain, where it has leading market shares in domestic loans and deposits. Its majority shareholder is the Kingdom of Bahrain through the wholly-owned Mumtalakat Holding Company (49%) and the Social Insurance Organisation (7.1%).