The ability of Bahrain’s government to maintain its infrastructure development programme and a GDP per capita of nearly $50,000, according to KPMG, should combine to generate ample opportunities for the kingdom’s banks to grow their assets. However, potential sector expansion is limited by the fact that the domestic market, characterised by a small number of blue chip corporates and a modest population of just 1.32m, is a relatively small one, even by GCC standards. One way for banks to counter this problem is to expand through mergers and acquisitions, a method which has been encouraged across the region by regulators keen to see their respective industries populated by a smaller number of institutions with larger amounts of capital.
When it comes to encouraging actors to consolidate within the Bahraini banking sector, the Central Bank of Bahrain (CBB) has preferred to approach banks directly as an unofficial broker rather than use regulatory tools such as capital requirements to force mergers. While this approach has met with some success, helping 11 banks to merge into four between 2009 and 2015, the process of encouraging mergers continues.
In late 2016 Bahrain’s GFH Financial Group announced that it was in talks to buy a majority stake in the sharia-compliant Bank Alkhair, pending the completion of a due diligence process and regulatory approval. However, despite progress, mergers in Bahrain and the wider GCC remain a challenging proposition, largely due to the fact that prominent local shareholders are frequently unwilling to surrender controlling positions, except in cases of significantly inflated valuations.
LOOKING ABROAD: The traditional route for Bahraini banks looking to expand their balance sheets, therefore, has been to expand overseas. Many financial institutions have established themselves in the kingdom expressly for that purpose, attracted to Manama by Bahrain’s reputation for regulatory excellence and a relatively low-cost environment. This is particularly true of banks operating on wholesale licences. According to data from the CBB in 2015, aggregate domestic assets for wholesale banks stood at a relatively modest $8.6bn, compared to the combined $100.1bn they held in foreign assets. Western Europe accounted for the largest share of their international activity, claiming 34.7% of their assets, followed by the GCC (excluding Bahrain) at 32.8%, Asia at 10.8%, other Arab countries at 8.5%, and North and South America at 8.4%. The past year has seen a number of interesting international forays from the Bahraini industry. The kingdom’s largest lender, Ahli United Bank (AUB), has opted to become an early mover in the challenging but potentially rewarding Iraqi market, purchasing a 10% slice of Commercial Bank of Iraq in 2016 to bring its total stake in the lender to 64.7%.
Meanwhile, Bank ABC, has set its sights on targets both near and far. After engaging in a recruitment drive in 2015, during which it brought on board a number of senior bankers, it has applied for regulatory approval to open branches in the Dubai International Financial Centre and Singapore as part of its wholesale banking strategy. The bank, which is the second-largest in Bahrain by assets, already operates a representative office in Singapore, which acts as liaison point between the bank and its counterparties throughout Asia.
TURNING TO TURKEY: Lastly, the Bank of Bahrain and Kuwait, which is the fifth-largest bank in Bahrain by total assets, entered the Turkish market in 2015 when it opened an agency in Istanbul’s commerce and finance centre. According to the bank, the new agency will be tasked with primary assignments, including the nurturing of close relations with current and future Turkish clients, monitoring developments in the domestic market and establishing lines of communication with the Turkish authorities.
The outward expansion of Bahrain’s banking sector is a well-established trend, and with domestic market competition expected to continue to rise, it is likely that more and more Bahraini banks will look to markets further afield to fuel their plans for greater expansion.
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