Bahrain’s Banks Maintain Growth Momentum, Says Bahrain Association Of Banks

Bahrain hosts 404 financial institutions of which 116 are banks. Of these 29 are retail banks and 76 in the wholesale sector. In total, 34 are considered to be domestic banks. This compares with the 42 at the beginning of 2013 and reflects the efforts of the Central Bank of Bahrain (CBB) to encourage banks to consolidate their activities, switch licence categories and in some cases to cease operations.

The most recent consolidated data comes from the Bahrain Banks Annual Review 2014 which provides information up to the end of 2013 and will be published in mid-January.  In the report, the benchmark indicator which measures total assets shows how the 34 Bahrain-domiciled banks have recovered from the low of $125.937 billion recorded in 2009 to post total assets of $153.478 billion in 2013.

By the end of the first half of 2014 this had grown by $568 million to $154.046 indicating a consistent upward trend. This strength is emphasised by individual bank results for the first three quarters which again show a substantial growth in both assets, pre-tax profits and loans and deposits. In fact total assets have grown by 22 per cent since 2009 and are higher than before the global financial crisis when Bahrain’s banks had $142.872 billion worth of assets.

The $12.320 billion increase in total assets between 2012 and 2013 was the biggest year-on-year improvement – an impressive eight per cent and shows that the recovery is very real and is gaining traction although growth in 2014 is likely to be around the five per cent mark.

The banking sector in Bahrain is heavily weighted towards the ‘big players’ with the top seven banks – Ahli United Bank, Arab Banking Corporation (ABC), Gulf International Bank (GIB), Al Baraka Banking Group (ABG), BBK, NBB and Ithmaar Bank – accounting for over 80 per cent of all assets so it is possible to identify key trends.

In terms of category the largest grouping of banks is Wholesale Islamic with 12 institutions or 35 per cent of the total followed by Wholesale Conventional with nine institutions or 26 per cent. Conventional Retail and Islamic Retail comprise seven and six institutions representing 20 per cent and 17 per cent respectively.

Conventional Retail banks have the largest share with $53.933 billion followed by Conventional Wholesale a touch lower with $53.145 billion. In the Islamic banking sector, Wholesale providers despite contributing the largest number of institutions only have $26.361 billion worth of assets while Islamic Retail is the smallest sector with $19.978 billion.

This split between Conventional and Islamic is clearly seen when assessing the average size of banks in Bahrain – $4.514 billion in 2013 compared with $3.704 in 2009. The mean size of a Conventional Retail bank is $7.713 billion followed by Conventional Wholesale with average assets of $5.905 billion. Islamic Retail banks average $3.330 billion in size while Islamic Wholesale banks constitute the smallest sector with $2.197 billion worth of average total assets.

Net Profit, the most closely-watched indicator in banking, rose from $1.322 billion in 2012 to $1.826 billion in 2013. Conventional Retail posted profits of $940 million in 2013 followed by Conventional Wholesale and Islamic Wholesale. Islamic Retail posted a loss of $65 million in 2013 but this year there will be a positive gain as a result of profits from both Ithmaar Bank and KHCB as opposed to the losses posted a year earlier. Extrapolating net profits of approximately $953 million for the first half of 2014 shows that the banking sector is on target to exceed 2013’s total for the year although it will be significantly short of the $2.212 billion recorded during the peak of the real estate boom in 2007. However it does show a huge jump from the lows of 2009 when local banks posted losses of $1.460 billion for the year.

Net Interest Margin, a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders in deposits, rose from a low of 1.90 per cent in 2009 to 2.02 per cent in 2013. Return on Average Assets (ROAA), a per centage which shows how profitable a bank’s assets are in generating revenue, showed an increase from -0.84 per cent in 2009 to 1.24 per cent in 2013.

A similar jump was seen for Return on Average Equity (ROAE), which typically refers to the performance of bank’s shares over a fiscal year. The indicator rose to 7.84 per cent in 2013 – up from 5.98 per cent in 2012 and a low of -5.74 per cent in 2009.

Cost-to-Income Ratio, another key indicator of a bank’s health, is also moving in the right direction. The 2013 ratio, which shows a bank’s costs including administrative and fixed costs, such as salaries and property expenses (but not bad debts that have been written off) by operating income, fell to 51.11 per cent from 52.50 per cent in 2010.

Non-Performing Loans (NPLs) peaked at 5.63 per cent in 2012 and, while the 5.10 per cent recorded in 2013 is an improvement, it still indicates that there is a long way to go to meet rates below 2 per cent before the global financial crisis.

For the period under review, the banking sector assets showed a Compound Annual Growth Rate (CAGR) of 4.03 per cent and the fact that this rate of growth doubled between 2012 and 2013 suggests that a new phase of development for Bahrain banks has started which is marked by sustainable growth and increasing profitability.

There has been a steady improvement in total assets of the Retail Conventional banking sector over the last five years with a 35 per cent improvement from 2009 to 2013, while the Wholesale Conventional banks had a marginal improvement of seven per cent by 2013. The Islamic total assets have also shown an improvement since 2009 where Wholesale Islamic banks showed a growth of 32 per cent compared to 2009.

An analysis of the Assets structure shows that loans accounted for the majority of the asset base (46 per cent – 2013, 47 per cent – 2012). The relative composition of the assets remained stable over the last two years. Other Earning Assets form 41 per cent of the asset base in 2013 and 2012.

Non-earning assets, which have risen fractionally from 11 per cent to 12 per cent, are those assets that by their characteristics do not generate interest income for the bank. Generally speaking, a financial institution would prefer to minimise such assets, which are primarily composed of cash and payments from balances, premises and equipment, bank owned life insurance, intangibles and “other” assets.

An analysis of the banks’ liabilities and equity structure shows that Deposits and Short-term funding accounted for the majority of the share, with 73 per cent in 2013 and 74 per cent in 2012 respectively. The Bahrain banks rely mainly on funding from deposits from customers and financial institutions and thus have the larger share. Banks in Bahrain have a moderate-to-low reliance on international capital markets and interbank funding. Equity accounts for the other major source of funding for banks, accounting for 16 per cent in 2013 and 2012 respectively.

In total customer deposits reached $89.86 billion at the end of 2013 compared to $77.48 billion a year earlier – an increase of 15.5 per cent. The Islamic sector (including retail and conventional) has a ratio of approximately 40 per cent of net loans over total assets, compared to retail conventional which has a ratio of approximately 50 per cent. The wholesale conventional sector has a lower per centage of approximately 25 per cent. This, however, is an improvement from 18 per cent in 2009.

The cost of money via lending rates has remained fairly static in 2014. The rate for savings is around 0.25 per cent while deposits of less than three months for sums larger than BHD 10,000 have generated between 0.54 and 0.61 per cent. Longer term deposits have remained in a band between 0.93 and 1.13 per cent. The current rate of business loans including overdraft approvals is 5.6 per cent. In January this fell as low as 4.19 per cent. The average for construction and real estate loans is 5.99 per cent ranging from 5.42 per cent to 9.5 per cent.

The rate of personal loans range from between 5.61 per cent (as of October) for secured mortgages to credit cards at 18.3 per cent and unsecured loans for people with poor credit records at around 22 per cent. Again there is a large range of rates between providers that take many key factors into account.

Performance of leading Bahraini banks in 2014

AUB: The Group‘s total assets rose to $34.1 billion, an increase of 4.5 per cent over the 31 December 2013 position.  Net profit attributable to its shareholders of $376.3 million for the nine months ended 30 September 2014. This reflected an increase of 30.1 per cent over the core net profit of $289.3 million achieved in YTD Q3/2013.This increase was driven by a $1.4 billion (+8.2 per cent) increase in the loan portfolio to reach $18.7 billion by 30 September 2014. The growth in loan and advances was funded by an increase in customers’ deposits to $24.4 billion as at 30 September 2014.

ABC: The Group’s total assets registered a growth of 9 per cent during 2014 to stand at $28.9 billion as of 30 September 2014 while its consolidated Group net profit for the first nine months of 2014 was $197 million, an increase of 11 per cent over the $178 million for the same period last year. Deposits grew by 7 per cent during the year to $19.6 billion from $18.3 billion at 2013 year-end. New borrowings of $0.9 billion during the quarter resulted in term borrowings to reach $3.7 billion. The ratio of NPLs (non-performing loans) to gross loans improved to 2.5 per cent from 3.0 per cent at 2013 year-end.

GIB: Consolidated total assets at the quarter end were $22.2 billion, being $1.0 billion or 5 per cent higher than the 2013 year end level. Reported consolidated net income after tax of $72.7 million for the nine months ended 30th September 2014, compared to $101.5 million in the prior year period. This was lower principally due to one off income items amounting to $20.9 million and a $16.1 million year-on-year increase in operating expenses driven by the roll-out of its universal banking platform. Loans and advances amounted to $8.5 billion, being $0.2 billion higher than the 2013 year end level, reflecting ongoing growth in the Bank’s lending activities. There was a further improvement in the Bank’s funding profile with a $0.3 billion increase in customer deposits.

ABG: Total assets increased by 8 per cent to $22.5 billion compared with $20.9 billion at the end of 2013. Net income amounted to $207 in first nine months of 2014 compared to $197 million in first nine months of 2013, which reflects an increase of 5 per cent. Customer accounts have also witnessed a good increase of 8 per cent from $17.7 billion at the end of December 2013 to $19.2 billion at the end of September 2014,

BBK: Total assets increased by 1 per cent to stand at BHD 3,331 million ($8.83 billion) net profit of BHD 37.3 million ($98.91 million) for the nine months ended 30th September 2014, representing an 8 per cent increase over the same period of 2013. Net loans and advances has grown by 13.3 per cent to stand at BHD 1,822 million ($4.831 billion) for the third quarter of 2014. Total deposits reported at BHD 2,577 million ($6.834 billion) as of September 2014.

NBB:  Total assets increased by 8.65 per cent to BHD 2.894 billion ($7.697 billion) from BHD 2.650 billion ($7.084 billion). Net Profit of BHD 42.16 million ($112.13 million) showed growth of 5.2 per cent over the previous year. Customer Deposits as at 30 September 2014 stood at BHD 2,184.14 million ($5,808.88 million) compared to BHD 2,118.47 million ($5,634.23 million) as at 30 September 2013. Loans and Advances were BHD 913.72 million ($2.430 billion compared with BHD 874.80 ($2.326 billion) a year earlier – an increase of 4.47 per cent.

Ithmaar Bank: Total assets increased by 2.86 per cent to $7,634 billion as of the end of the second half of 2014. Net profit of $4.84 million for the nine-month period ended 30 September 2014, compared to a net loss of $11.97 million reported for the same nine-month period last year. Customer current accounts have increased to $1.29 billion as at 30 September 2014, an increase of 10.08 per cent compared to $1.18 billion as at 30 September 2013. Liquid assets now represent 13.1 per cent of the balance sheet as at 30 September 2014.

The Bahrain economy

Bahrain has maintained its Baa2/BBB+ rating from the key agencies although it is now on negative watch which also impacts state-owned or quasi-government organisations including banks.

According to rating agency Moody’s, Bahrain’s vulnerability to external economic and financial shocks is cushioned by its strong external position as reflected in a solid net international investment position of 77 per cent of GDP, and current account surpluses have averaged 7.8 per cent of GDP over the last 10 years.

Bahrain’s relatively low external breakeven oil price, which the IMF projects to be $65.5 per barrel in 2015, also supports its external position and the agency expects a sustained period of low oil prices to have a manageable impact.

Moody’s forecasts 3.5 per cent real GDP growth for 2015, down from an estimated 4 per cent in 2014. Several large, multi-year investment projects are likely to support growth in the coming years. This is balanced by fellow rating agency Fitch which forecasts 4.3 per cent overall GDP growth this year and next. It also points out that Bahrain’s external position is stronger than its ‘BBB’ rated peers. It points out that Bahrain registered a current account surplus of an estimated 6.7 per cent of GDP in 2014 and although this will decline next year, Fitch still expects a figure in excess of 4 per cent of GDP.

“The banking sector is large, at 650 per cent of GDP, but has weathered a number of global, regional and local shocks in recent years. The wholesale banking sector’s assets (at around 350 per cent of GDP) have stabilised after five years of decline. Consolidation is continuing in the small Islamic retail banking sector, where there have been some asset quality problems,” said Fitch.

Banking and Finance issues in 2014

• Basel III Capital Adequacy Requirement to be met by all banks by January 2015
• Banks now compliant with US FATCA regulations introduced by CBB
• Banks to tighten up on ATM security as a result of fraud. This is currently under discussion at the CBB.
• CBB introduces new rules on remuneration and bonuses
• Bahrain Bourse introduces measures to boost equities including Bahrain Investment Market (BIM) index

Latest CBB employment figures

The latest CBB employment figures for the financial sector show that there are 14,009 employees of which 9,453 (66 per cent) are Bahrainis and 4,756 (34 per cent) are foreign nationals. Figures from the BIBF and successful programmes from Tamkeen ensure that there is a flow of well-qualified people entering the sector in areas where there are skills gaps. This includes the Career Progression Programme where young bankers can get the international qualifications essential to developing careers in finance. BIBF has also unveiled the first real-time electronic trading room for educational purposes in the MENA region.

Originally published on www.cpifinancial.net