For a country with a population of 1.2m, Bahrain has a complex banking landscape with 104 institutions holding licences as of March 2014. There are 80 conventional banks, including 22 conventional retail banks, and 24 Islamic banks, of which six are retail banks. The Central Bank of Bahrain (CBB) has been urging greater consolidation across all segments to create more robust entities that are better able to weather any financial shocks. Consolidation took place during 2013-14 and further activity is expected going forward. The result has been closer ties across the divisions.

Mixed Merger

In February 2014 the Islamic retail lender Al Salam Bank Bahrain (ASBB) and the conventional retail BMI Bank completed a merger agreement through a share swap of 11 ASBB shares for one BMI Bank share. BMI Bank, which was incorporated in 2005, has a headquarters and eight branches across Bahrain, while ASBB, which was founded in 2006, has a headquarters and five branches. BMI Bank is an associate of Oman’s BankMuscat, which owned 49% of its shares, and so the merger also promises access to opportunities outside the country for ASBB. The BMI Bank deal comes two years after ASBB acquired Bahrain Saudi Bank, which had been formed in 1983 with paid-up capital of BD20m ($52.8m). The latest merger has created Bahrain’s fourth-largest bank just eight years after ASBB made history on the Bahrain Bourse with its initial public offering (IPO). In 2006 the IPO for 35% of its paid-up capital became the largest such offering in the kingdom’s history and raised BD2.7bn ($7.13bn).

The merger presents some immediate challenges for BMI Bank as its conventional offerings will have to be converted into sharia-compliant products, and this will involve training for staff and effective communication with customers. However, the deal presents opportunities for the combined bank to manage bigger transactions as a large Islamic entity in Bahrain. BMI Bank’s branding will remain the same in the short term, but it will be described as a wholly owned subsidiary of ASBB. The latter has a strong portfolio of commercial clients in real estate, enabling BMI Bank to strengthen its mortgage offering to customers.

NBB & Bahrain Islamic Bank

BMI Bank and ASBB are not the only retail banks to see value in the synergies offered by combining conventional and Islamic services. In March 2013 the country’s second-largest retail bank by assets, NBB and the Social Insurance Organisation Asset Management Company bought a 51.6% stake in Bahrain Islamic Bank (BisB), with each organisation taking a 25.8% share. NBB’s CEO and director, Abdul Razak Al Qassim, said the investment represented a key strategic objective for NBB. “We have been looking for an appropriate opportunity to establish a footprint in the Islamic banking industry and BisB represents a suitable vehicle for us,” he said. The Islamic bank Ithmaar has had a 25.38% stake in Bahrain’s third-largest retail lender, BBK, since 2008.

Ibdar Islamic Bank

In December 2013 three Bahrain-based Islamic banks announced that after 12 months of integration and negotiations they would be rebranded as Ibdar Bank. Elaf Bank, Capivest and Capital Management House agreed to merge in January 2013. “The bank is well positioned to undertake substantial and high-quality deals and to more effectively participate in the capital markets,” said Ibdar’s chairman, Paul Mercer. The combined bank has BD113.10m ($298.61m) of paid-up capital, BD124.03m ($327.46m) in equity and assets of BD135.72m ($358.33m), and plans to target private equity, capital markets and real estate in the GCC, North Africa and South-east Asia.

Ahli Bank Qatar Sale

With profits of BD138.17m ($364.8m), Bahrain’s biggest retail lender, Ahli United Bank, was already recording a 25.7% increase on 2012’s BD126.56m ($334.14m), but the bank also decided to sell its 29.4% stake in Ahli Bank Qatar in 2013 for BD80.26m ($211.9m) and this resulted in total profits of BD218.43m ($576.7m), up 72.6%.

Although Ahli United Bank may have lost some regional influence, the bank’s decision to consolidate its activities has certainly strengthened its balance sheet.

Two Islamic banks spent months negotiating a possible merger in 2013 before deciding not to go ahead. The investment lender Bank Alkhair and retail lender Khaleeji Commercial Bank could not agree on a price, but according to CBB sources, both institutions are actively looking for merger opportunities. Bank Alkhair returned to profitability in 2013, with net profit of $4.7m compared to a loss of $39.8m in 2012. At the end of the year Alkhair’s total assets stood at $628.67m compared to $442.2m in 2012. It announced an improvement in the performance of its portfolio companies, with Bahrain Financing Company expanding into India and Malaysia; t’azur Company filing for an initial public offering on the Muscat Securities Market in the first quarter of 2014; and the Al Tajamouat Mall in Jordan reporting full occupancy. Although the merger with Khaleeji Commercial Bank did not proceed, the memorandum of understanding signed between the two institutions to discuss the merger was highlighted as “a milestone” for Khaleeji’s main shareholder, Gulf Finance House (GFH), in its February 2014 annual report. GFH has a 47% stake in Khaleeji, worth BD28.7m ($75.77m) as of April 2014. Although its total assets were up 14.6% to BD542.2m ($1.43bn) in 2013, Khaleeji reported a net loss of BD19.2m ($50.69m) for the year compared to a profit of BD750,000 ($1.98m) in 2012.

Restructuring Efforts

The planned merger for Khaleeji had been part of wider restructuring efforts by GFH, which also reported it had sold a 75% stake in Leeds United Football Club at the end of 2013. The company’s annual report also says new development deals and partnerships have enabled it to make progress on infrastructure and real estate projects, including Tunis Financial Harbour, Mumbai Economic Development Zone and Royal Ranches Marrakech. GFH reported profits, before provisions, of BD3.51m ($9.27m) in 2013, down from BD7.7m ($20.33m) in 2012. The bank’s financial statement for the fourth quarter of 2013 showed total liabilities of $381m. According to Reuters, GFH had total liabilities of $2bn at the peak of the financial crisis, and in 2007 and 2008 its profits combined with those of Bahrain’s Arcapita totalled $1.3bn, but then the two firms saw combined losses of $1.73bn between 2009 and 2010, prompting both to restructure. Arcapita filed for Chapter 11 protection in a New York court in 2012 when it was unable to refinance a $1.1bn loan, and in September 2013 it emerged from Chapter 11 with a five-year plan to sell assets and pay its creditors, including its biggest creditor, the CBB, which, according to Reuters, is owed $255m.

Looking Ahead

The director of the CBB’s Islamic financial institutions supervision directorate, Hussain Ali Sharaf, remains optimistic that more mergers will be announced in the near future, further bolstering the strength of individual banks. “Consolidation is very important and the government has announced this,” he told OBG. “We would like to see banks being bigger and stronger and the best way to do that is to merge.”

Although BMI Bank will continue to trade as a wholly owned subsidiary of ASBB, the merger means that, in effect, there are now 12 locally owned retail banks, half of them Islamic lenders, and so there are fewer opportunities for consolidation. Two of the conventional retail banks, Bahrain Development Bank and Eskan Bank, have limited licences and focus on providing credit for small and medium-sized enterprises and housing finance, respectively, while Future Bank’s business is centred on commercial activities in Iran. The remaining 16 retail conventional banks are foreign-owned and so subject to the strategies and constraints of their international owners. There are 13 locally owned conventional wholesale banks, including some small lenders. While Ahli United Bank has the biggest market capitalisation of any bank listed on the Bahrain Bourse at BD1.7bn ($4.49bn), Bahrain Middle East Bank (BMB) is the smallest listed lender, with a market capitalisation of BD13.5m ($35.64m) as of April 2014. BMB reported a loss of BD1.76m ($4.65m) in 2013, compared to a profit of BD830,000 ($2.19m) in 2012. In that same month, BMB formally asked Fitch to discontinue rating the bank, stating that the board and management of BMB “do not believe that a credit rating is appropriate for a bank of BMB’s size”. Fitch had issued a long-term issuer default rating of “B-” with a negative outlook citing “weak profitability, limited business activities, fairly high exposure to market risk through its remaining legacy investments”. BMB reports it has a capital adequacy ratio of 15.6%, above the CBB requirement of 12%, and plans to support trade finance, digital media and e-commerce in order to boost profitability in 2014.

It may be the smallest bank listed on the bourse, but BMB’s annual report made no mention of plans to heed the calls for consolidation. Rather, in April 2014, Reuters reported that it was the country’s biggest lender, Ahli United Bank, which was considering a BD1.89bn ($4.99bn) sale or merger. The move would enable its major shareholders, Kuwait’s Public Institution for Social Security, Tamdeen Investment Company, Sheikh Salem Sabah Al Nasser Al Sabah and Bahrain’s Social Insurance Organisation, to cash in on the success of the bank, whose shares rose 14% in the first quarter of 2014.