“Deposit outflows that occurred during 1H11 largely reversed and stabilised, with no emergency support required by the leading retail banks. However, there may have been some reputational impact on Bahrain as a stable regional financial centre, which will continue for some time,” Fitch added.
“The loan books of each of the Fitch-rated Bahraini banks have different geographic risk profiles, as a result of the banks’ different business models and strategies. As wholesale banks, ABC and GIB have very limited exposure to Bahrain, despite being headquartered there. The domestic retail banks (BBK and NBB) have a more significant presence in the domestic market, and so are generally more constrained by the local operating environment. AUB is geographically diversified, with significant operations in Kuwait and elsewhere in the Middle East and the UK, with Bahrain on-shore operations contributing less than 13% of the group’s profit,” it added.
“AUB’s VR reflects the bank’s solid operating profitability, despite the challenging operating environment in some of its markets, and its sound liquidity and funding base. Asset quality metrics are strong and compare well with peers’. The loan book is somewhat concentrated, but this is mitigated at group level by its geographic and sector diversification and the group’s largely highly rated investment portfolio. Corporate governance is generally a negative rating consideration in the region, although Fitch believes that this has been addressed better by the AUB group than some of the other rated banks in the region.
“The VR of ABC reflects the bank’s resilient operating performance, strong capitalisation, comfortable liquidity position, geographical diversification and improved funding position, while also considering concentrations on both sides of the bank’s balance sheet and its exposure to highly volatile markets in the Middle East/North Africa (MENA) region. In particular, ABC’s Brazilian subsidiary, Banco ABC Brasil S.A. (BABC: BBB-/Stable) remains a significant contributor to the group’s overall profitability (2012: 42% of operating income). In May 2012, Fitch upgraded BABC one-notch to ‘BBB-‘
“BBK’s VR is underpinned by its satisfactory and fairly resilient financial performance, despite the uncertain operating environment in Bahrain. Its well-established franchise and satisfactory funding and liquidity indicators are important rating drivers. The VR also considers BBK’s historically weak asset quality and capital ratios that lag those of its closest peers’. Fitch notes that BBK’s underlying NPL ratio (which excludes fully-reserved NPLs) is healthier than the headline ratio. BBK’s management has indicated that they will consider a capital increase to improve capital ratios, once the Central Bank of Bahrain has given guidance on Basel 3 minimum capital requirements.”
“GIB’s VR reflects the bank’s improving asset quality, comfortable liquidity and strong capital position, while also considering GIB’s subdued operating profitability and the execution risks of expanding into retail banking in Saudi Arabia. Despite these risks, Fitch views GIB’s entry into the Saudi retail market as positive, and will likely benefit the bank’s diversity of earnings and funding over the medium-term.
“The VR of NBB reflects the bank’s leading domestic franchise, consistent profitability, generally healthy asset quality, very strong capitalisation and sound liquidity. They also consider NBB’s reliance on a small and competitive domestic environment and high concentrations in both loans and deposits.
AUB’s VR could be sensitive on the downside if asset quality and liquidity deteriorate significantly or if its Fitch Capital Core (FCC) ratio is severely eroded. Upside potential is currently limited, considering concentration in the loan book as well as the uncertain operating environment in Bahrain and elsewhere in the Middle East, notably Egypt.
“ABC’s ratings are sensitive to the on-going political uncertainty in Libya, and the risk of an escalation of political and social unrest in MENA. Any material deterioration in the profitability and asset quality of ABC’s Brazilian subsidiary could also have a negative impact on the ratings, in light of its significance to the group’s profitability. Upside potential for ABC’s ratings could arise from stronger profitability and measured progress in the bank’s strategy to expand its regional franchise.
“Upside potential to BBK’s VR would likely stem from an improvement in the bank’s asset quality metrics and a stronger capital position. Downside risk to the VR could arise if the socio-political climate in Bahrain materially deteriorates – which is not Fitch’s central scenario – if asset quality considerably weakens or if the negative trend in BBK’s capital ratios continues to worsen from current levels.
“Downside risk to GIB’s VR could arise from a prolonged delay in the new retail strategy becoming profitable or negative developments eroding the bank’s healthy capital buffer. These could come, for example, from uncontrolled loan growth, a spike in NPLs or rapid expansion into new international investments, none of which are in Fitch’s base-case assumptions. An upgrade would likely result from improved profitability metrics and tangible evidence that the new expansion strategy is successfully gaining traction.
“Upside potential for NBB’s VR is somewhat limited at present because of the uncertain operating environment in Bahrain, while downside risk might arise from further deterioration in NBB’s asset quality.
“The subordinated debt of ABC, AUB, BBK and GIB are rated one notch below the banks’ respective LT IDRs, reflecting Fitch’s view that institutional support (ABC, AUB and GIB) and sovereign support (BBK) would flow through to all senior and Basel II Lower Tier 2 subordinated debt issuance, even though, as per Fitch’s criteria, subordinated debt would typically be notched down from the VR. The one notch reflects loss severity relative to average recoveries.”