Thanks to a famously prudent yet flexible regulatory system, Bahrain’s lenders have been able to extend from a relatively small domestic base to become significant regional and global players. The extent of their reach helps them remain resilient amidst the challenges caused by regional unrest and falling oil prices over the past year. While these potential obstacles to growth remain, the sector’s strong aggregate balance sheet means that it is well positioned to take advantage of both domestic and global lending opportunities as they arise.
Century Of Progress
The development of Bahrain’s modern banking sector began nearly 100 years ago, when the UK-based Standard Chartered became the first bank to open its doors for business in the kingdom. The move came after years of negotiations with local leaders, and heralded a new era of financial sector expansion. It was during this time that a host of international banks chose Bahrain for their regional operations.
By the late 1950s, local institutions were beginning to make their presence felt, starting with the establishment of the National Bank of Bahrain (NBB) in 1957. These domestic lenders combined with foreign institutions to establish Bahrain as a banking centre in the region – a process that was greatly accelerated in the mid-1970s, when the Lebanese civil war resulted in many banks and financial institutions relocating from Beirut to Manama, bringing with them a community of banking professionals and their collective expertise. More recently, the emergence of other commercial centres in the Gulf has brought a heightened level of competition for the title of regional financial centre, but Bahrain retains a number of advantages (see analysis). A large, highly skilled pool of financial workers, a regulatory structure that is both advanced and internationally well regarded, and a physical connection to Saudi Arabia – by far the largest economy in the Gulf – combine to make Bahrain an attractive destination for the global banking market.
Today, Bahrain’s diverse banking industry is divided by the licensing regime into both conventional and Islamic retail and wholesale operations, with numerous institutions holding multiple licence types. As of July 31, 2015, the Central Bank of Bahrain (CBB) register held 22 conventional retail banks, seven of which were locally incorporated and 15 of which were headquartered abroad. The local retail banking segment is dominated by three players that run branch networks considerably larger than those of their colleagues: National Bank of Bahrain, with 25 branches; Ahli United Bank (AUB), with 20 branches; and Bank of Bahrain and Kuwait (BBK), with 16 branches. Other retail banks operating in the kingdom, such as BNP Paribas, HSBC and Citibank, maintain networks of between two and six branches, or in some cases conduct their business from a single head office.
Much of Bahrain’s reputation as a regional banking centre, however, rests on the activities of its wholesale banks, known as offshore banks until a reorganisation of the sector in 2006. These institutions often play a significant role in the region, as well as compete for business within Bahrain. As of July 2015 some 57 conventional wholesale banks were licensed to operate in the country, including locally incorporated players such as Bank ABC, Gulf International Bank (GIB) and Investcorp; regional banks such as Jordan’s Arab Bank and Saudi Arabia’s Arab Investment Company; and regional banks with a presence in Bahrain focused on corporate clients, such as Pakistan’s Allied Bank, India’s Bank of Baroda, the Philippines’ Allied Banking Corporation, Credit Libanais of Lebanon, and Finansbank, Denizbank and Turk Ekonomi Bankasi (all from Turkey).
Since the 1980s Bahrain’s banking sector has contained a growing number of sharia-compliant institutions. Currently, six retail Islamic banks operate in the kingdom, as well as 18 wholesale operators. One institution, the Al Baraka Group, holds both retail and wholesale licences. Between them, Bahrain’s Islamic lenders offer an array of sharia-compliant products and services, including restricted and unrestricted investment accounts, syndications and other structures found in conventional finance that have been modified to comply with sharia principles. The growth of the Islamic banking segment within the wider banking sector has been rapid: according to the CBB, between 2000 and 2015 the market share of Islamic banks increased from 1.8% of total banking sector assets to 13.5%. The result of this expansion is one of the most dynamic Islamic banking markets in the world (see Islamic Financial Services chapter).
An examination of the nation’s “Big Five” locally incorporated lenders reveals the diversity of the market: Bahraini banking groups with an international focus compete for business with national players that have built their balance books within the Bahraini economy, and conventional institutions rub shoulders with Islamic banks for business both inside and outside the domestic market. All have lately faced similar challenges: the aftershocks of the global economic crisis have combined with local and regional political upheavals to undermine client activity and widen credit spreads. Yet measured by total assets, all of Bahrain’s largest banks have turned in robust performances that augur well for the future of the sector.
With total assets of $33.4bn as of the end of 2014, the Ahli United Bank Group, the flagship of which is AUB, is the largest locally incorporated lender in Bahrain. Established in 2000 with the merger of the United Bank of Kuwait and Al Ahli Commercial Bank, it operates in the local market under a retail licence, but its network of subsidiaries and associated companies provides it with corporate, private and Islamic banking capacity across a number of regions. AUB United Kingdom is a wholly owned operation, while the group has an 85% stake in AUB Egypt, a 74.9% stake in AUB Kuwait, a 68.9% stake in Commercial Bank of Iraq, and smaller interests in Libya, Oman and Qatar.
The group provides its sharia-compliant services through the Al Hilal brand. In 2008 it broadened its product offerings further with the signing of a memorandum of understanding with the UK-based Legal & General Group to establish a joint venture company providing life coverage, health insurance and pension plans. The bank’s strategy remains centred on expansion within the GCC and MENA region, and in 2015 it continued to lay the foundations of this growth with the offering of a $400m Tier 1 bond issue, which enhanced its capital reserves.
With total assets of $29.4bn at the end of 2014, Bank ABC, another international universal bank headquartered in Manama, is the nation’s second-largest lender. Founded in 1980, its footprint spreads across 18 countries in the GCC, MENA, Europe, the Americas and Asia. Beyond its retail activity, it has built a reputation as a market leader in trade finance, treasury, project and structured finance, syndications, corporate and institutional banking, and Islamic banking (conducted through its sharia-compliant arm, ABC Islamic Bank). Formerly known as Arab Banking Corporation, in June 2015 the bank announced that it had revamped its corporate identity and rebranded itself as Bank ABC, and that it would continue to grow its primary banking franchises in MENA and Brazil while seeking opportunities to add to its primary markets, international network and capabilities.
With total assets of $23.5bn at the close of 2014, Al Baraka Banking Group is the third-largest banking conglomerate headquartered in Bahrain. It is also the largest Islamic banking group based in the kingdom, offering retail, corporate and investment banking and treasury services according to the principles of sharia law. Its geographical presence extends across 15 countries in the form of subsidiary banking units and representative offices – including Jordan Islamic Bank, Al Baraka Bank Pakistan, Banque Al Baraka D’Algerie, Al Baraka Bank Sudan, Al Baraka Bank South Africa, Al Baraka Bank Lebanon, Al Baraka Bank Tunisia, Al Baraka Bank Egypt, Al Baraka Türk Participation Bank, Al Baraka Bank Syria, and representative offices in Indonesia and Libya (although the operations of the latter are currently on hold). While components of the group date back to 1978, the group was officially formed in 2002 and issued an initial public offering in 2006.
Since then, it has grown steadily, establishing niches in key markets that are non-correlative and therefore represent – according to the bank’s strategy statement – a natural risk diversification. Its exposure to many of the countries most affected by the “Arab Spring” resulted in a ratings downgrade for the bank in 2013, but since that time it has shown a solid performance, with total assets, customer deposits, loans and advances, and net profit all growing year-on-year in 2014. Building on this progress, the bank announced in August 2015 that it plans to almost double its assets to $46bn over the coming five years by expanding into markets such as Morocco, Indonesia and China.
Gulf International Bank
Established in Bahrain in 1975, GIB is the nation’s fourth-largest lender, with assets of $21.3bn at the close of 2014. The bank is a significant corporate player in the region, and has a major presence in the UK through its principal subsidiary GIB UK, which focuses on asset management and investment banking. Its branches in Riyadh and Jeddah, meanwhile, allow it to access the neighbouring market in Saudi Arabian market – a feature further enhanced by the fact that Saudi Arabia’s Public Investment Fund maintains a 97.2% stake in the bank.
The bank operates dealing rooms in Bahrain, London and Dharan in Nepal, from which it carries out portfolio trading, hedging and investment operations, and investment in specialised markets through external fund managers to achieve effective risk diversification. While historically focused on project finance and wholesale banking, in 2010 it adopted a new strategy aimed at establishing the bank as a universal GCC institution, operating across the core areas of corporate banking, investment banking, asset management and retail banking. To this end, the bank has attained a retail banking licence in Saudi Arabia, and has applied for more retail licences in other GCC jurisdictions. The evolution of GIB from its wholesale, asset management and treasury base to a regional retail player promises to be one of the more interesting developments arising from the Bahraini banking sector over the upcoming years.
Bank Of Bahrain & Kuwait
BBK, with assets of $9.3bn at the close of 2014, is the largest of the domestic banks, with a predominantly local focus. Established in 1971, it has in the intervening years become a pioneer in the domestic banking sector, most notably in through the “Financial Mall” concept it introduced to Manama. The retail-focused centres bring numerous services – including credit card partners, telecommunications operators, personal finance advisors and insurance providers – together under one roof. Beyond its retail activities, BBK offers lending, treasury and investment services to the corporate sector in Bahrain and to businesses beyond the local market through the operations it runs in Kuwait, India and Dubai. It has also begun to widen its product portfolio by establishing subsidiaries in the areas of financial services, Islamic investment, mortgages and credit cards.
National Bank Of Bahrain
Finally, though NBB is outside the “big five” – with total assets of around $7.3bn at the close of 2014 – the institution is considered the leading provider of commercial and retail banking services in the domestic market. Though it also operates branches in Abu Dhabi and Riyadh, its focus remains largely on Bahrain, where, with 26 outlets, it operates the largest branch network in the country. Founded in 1957 as the nation’s first locally owned bank, its ownership structure has been central to its ability to attract business and play a key role in the development of the nation: Mumtakalat Holding Company, effectively the government’s investment arm, retains a 51% stake in the company, while government interests are further represented by the Pension Fund Commission, which owns 6.24%.
A Diverse Portfolio
The wide range of external markets served by Bahrain’s banking sector makes for natural risk diversification, and this characteristic has helped the industry to maintain a strong fundamental performance against a challenging global economic backdrop. While the global economic crisis of 2008 had a negative impact on wholesale banks exposed to the real estate sector, compelling the CBB to take over the operations of two institutions, the wider industry was relatively insulated from the financial shock. Even during the politically challenging year of 2011, aggregate year-on-year asset growth reached 2.6%, lending growth hit 14.9%, and deposit growth registered a 10.1% rise, according to CBB data.
This robust performance has continued to the present. While the events of 2011 resulted in a modest retrenchment of aggregate sector assets, from around $222.2bn at the start of the year to $186.3bn by the close of 2012, since that time the sector’s asset base has stabilised and returned to positive growth, standing at $189.6bn in June 2015.
An OBG analysis of the five largest banks for 2014 shows a similar performance. Aggregate assets grew from $109.9bn at the close of 2013 to reach $116.8bn at the end of 2014, a rise of around 6.3%. Customer deposits, and loans and advances, meanwhile, grew by 5.2% and 8.2%, respectively. While the combined net profit for the five lenders declined by 6.54% over the period, this was largely the result of GIB’s restructuring efforts rather than a weakening of technical performance. The single largest percentage rise in net profits for the year was made by BBK, which grew its income from $119.4m to $132m, or around 10%, followed by Bank ABC, which increased its profits by 7.1% over the period.
Importantly, this performance has not come at the expense of sector stability. Taken together, the financial soundness indicators of the conventional banking sector are strong by global standards. In August 2014, according to the CBB’s most recent Financial Stability Report, the aggregate capital adequacy ratio (Tier 1) for conventional banks stood at 18.3%, compared to 14.1% in the UK and 13.1% in the US, according to IMF data. Non-performing loans (NPLs) have shown a welcome decrease, falling from 4.2% in September 2013 to 3.8% by March the following year. As with most GCC banking sectors, the principal concern with regard to stability is the question of loan concentration. Bahrain’s Islamic retail banking segment has been tackling elevated NPLs due to concentrated exposures to local and regional real estate, according to the CBB, while the conventional sector continues to show high concentration levels, particularly in the retail sector.
The task of ensuring the long-term sustainability of the banking sector falls to the CBB, which oversees one of the best-regarded regulatory regimes in the region. The sector’s primary legislation is the Central Bank of Bahrain and Financial Institutions Law 2006, the Anti Money Laundering Law of 2001 and the recently revised Corporate Governance Code. The CBB also possesses a flexible regulatory tool in the form of the CBB Rulebook, the first two volumes of which are devoted to conventional banks and Islamic banks, respectively. In the wake of the global economic crisis the CBB has focused on ensuring that the banking sector is adequately protected from economic shocks, and to that end requires banks to maintain a minimum capital adequacy ratio of 12%, which is further boosted by a 0.5% capital conservation buffer, also made up of Tier 1 capital. This compares favourably to the minimum solvency ratio of 6% to 8% established by Basel III regulations.
In 2015 the regulator made an important advance in its implementation of the Basel Accords with the introduction of the liquidity coverage ratio. Brought into effect on January 1, with full compliance required by 2019 under Basel mandates, the regulation aims to ensure that banks have sufficient liquid assets to overcome an urgent stress scenario for 30 days. Other significant regulatory developments over the past year include establishing the banking sector’s systemically important domestic banks, as per Basel regulations, as well as the finalisation of Basel’s public disclosure rules for conventional banks. OBG understands from discussions with the CBB that it is currently working on similar disclosure regulations for Islamic institutions. The CBB has earned a reputation for its ability to keep pace with international best practice, and therefore the continued implementation of the Basel requirements is likely to remain a central focus.
The international focus of Bahrain’s wholesale banks – by which just 6.4% of their assets were located in Bahrain in 2013, according to CBB data – means that the bulk of big-ticket lending opportunities over the coming year will be derived from the two key markets that they serve: the GCC and Western Europe.
However, domestic opportunities are also expected to emerge from the development of national infrastructure projects, such as Bahrain National Airport and the upgrading of the refinery network, which is generating demand for long-tenor financing. Yet more opportunities are arising from the government’s attempts to address a housing shortage, which will require large-scale investment for years to come.
Looking to retail banks, the CBB’s efforts to boost lending to small and medium-sized enterprises (SMEs) is providing new lending opportunities for the sector. According to the CBB’s “Financial Stability Survey” in March 2014, 12.2% of total retail bank lending was directed to SMEs. The government body Tamkeen is playing a key role in raising this figure, and to that end has partnered with a number of banks in Bahrain to provide subsidised financing to smaller businesses. Under the partnership scheme Tamkeen subsidises 50% of the annual profit rate on sharia-compliant financing extended to qualifying enterprises, for facilities of between BD5000 ($13,200) and BD500,000 ($1.3m) and with repayment tenors of up to 10 years. Retail banks are also streamlining and expanding their services to make SME lending more efficient, with institutions such as the UAE’s Mashreq Bank adding dedicated online service platforms to facilitate this efficiency.
In terms of the sector’s overall performance, commercial real estate financing remains a growth driver for retail banks, accounting for 17.4% of their total lending as of March 2014, as does manufacturing (11.9%) and the competitive arena of personal and consumer finance (12.6%).
The next year will be one of questions for Bahrain’s banking sector. Chief among them is how stubbornly low oil prices will affect regional growth and the GCC project pipeline targeted by Bahraini lenders. While recent sovereign rating downgrades due to oil price concerns do not pose an immediate threat to growth thanks to regional support, the possibility of increased funding costs has the potential to temper lending activity. Another downside risk comes from the possible implementation of fees caps for consumer banking, which the CBB has been consulting on over the past year.
Looking to the upside, the continued spending on key infrastructure projects, underwritten by the Gulf Assistance Programme (see Economy chapter), represents a useful route to asset growth for Bahrain’s lenders, as does a retail segment driven by the nation’s expanding population. In addition to this, lending activity is expected to receive a useful fillip in the short term from the establishment of a Corporate Credit Reference Bureau, which banks began to report to in 2014. Until now, Bahrain’s well-regarded Credit Reference Bureau has limited its activities to consumer lending, where it has helped banks manage risk by providing them with credit information and background checks of their customers. The extension of coverage from the Credit Reference Bureau to the corporate segment promises to widen the availability of credit to smaller businesses and bring about an improvement in the credit quality of banks’ lending portfolios.