The banking sector could be facing a challenging year, with the swelling debt crisis in Europe threatening to overflow into the local economy. While most of the Kingdom’s lenders remain well capitalised and resistant to external shocks, overall growth could be muted.
Banking is core to the economy: the financial sector contributes more than 30% to GDP and a strong mix of conventional and sharia-compliant lenders are based in the Kingdom. It is also a major source of employment – more than 14,000 people are directly employed in the sector.
Due to the sector’s importance, any turbulence felt is taken seriously. Political turmoil at home, for example, could impact investor sentiment this year, and external factors such as the growing uncertainty over Europe’s financial affairs also pose a challenge to the sector. On March 19, Moody’s issued a report warning that the eurozone sovereign-debt crisis could have a direct impact on Bahrain’s banking sector, with lenders withdrawing capital amid sector-wide deleveraging.
“Direct exposure to the domestic operating environment is limited but increased risk perception and sustained outflows would trigger a significant slowdown in business volumes, as well as pose some serious structural challenges for this industry,” the report said.
This potential outflow of capital could see credit squeezed in 2012, with lower loan activity limiting growth and returns, while also dampening government development plans to stimulate the economy through infrastructure investment.
One locally based international lender, Arcapita Bank, appears to have already felt the flow-on effects of the debt chill in Europe, filing for bankruptcy protection in the US in mid-March, a move designed to give it more time to renegotiate its debt repayment of $1.1bn. While most of the bank’s creditors were prepared to sign off on rescheduling the debt, there were a few holdouts, believed to be European hedge funds.
Atif Abdulmalik, the CEO of Arcapita Bank, said he was confident a deal would be brokered with creditors, most of whom were agreeable to the bank’s restructuring proposals. He acknowledged that the downturn in the eurozone had negatively impacted the bank and had prompted Arcapita to seek an extension on its loan facility by three years.
“The Central Bank of Bahrain has been informed and we will continue to have a dialogue with the regulators,” Abdulmalik told local media. “Arcapita is committed to completing this reorganisation as quickly and efficiently as possible.”
Arcapita should take heart from the recent performance of another Bahrain-based Islamic lender, Gulf Finance House (GFH), which announced at the end of February it has returned to profit in 2011, after restructuring debts and enduring a lean couple of years.
GFH came back into the black in 2011 with a $381,000 profit and an operating profit of $9m before provision, a significant turnaround on the $187m net loss the preceding year. Thanks to a reduction in operating costs, with outlays cut by 37% and having restructured its organisation and some of its outstanding debts, GFH is now moving in the right direction, according to Esam Janahi, its executive chairman.
“Our strategy was put in place to realise long-term benefits for our shareholders, our investors and our employees,” Janahi said on February 29. “While this meant that we had to take some difficult decisions in the short term, and indeed experience a string of negative results, we have now returned to profitability as an institution, which was the target we were aiming for.”
Despite the concerns over the eurozone debt crisis, and the increasing competition from other regional financial centres vying with Manama to be the Middle East’s main banking centre, the number of financial institutions registered in the Kingdom rose in 2011. According to data released by the Economic Development Board (EDB) in early March, there were 415 banks and other finance institutions, including more than 120 conventional lenders with combined assets of around $200bn, registered at the beginning of the year, a dozen more than at the start of 2011.
As new financial institutions continue to make their way to Bahrain to set up operations and potentially avail of the sector’s strong reputation, local lenders and banks will continue to keep an eye to Europe in the event of further fallout.
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