Apr 09 2012
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Bahrain’s BBK Stays Profitable As It Weathers Local, Global Crises
Bahrain’s BBK Stays Profitable As It Weathers Local, Global Crises
Bahrain’s BBK managed to stay profitable last year despite the fallout from the Eurozone crisis and the popular protests that have hit the domestic economy. Chief Executive 'Abd al-Karim Ahmad Bucheery told Melanie Lovatt he is cautiously optimistic for 2012 and is already seeing the benefits of the commercial bank’s back-to-basics strategy.
BBK’s profits slipped to BD31.79mn ($84mn) in 2011 from BD39.14mn ($103.7mn) in the previous year. But a 13.4% return on average equity is a strong performance, given that for the Bahraini banking sector problems of a local nature were superimposed on already shaky global market conditions.
With the Bahrain problems coming on the back of the continued shock waves from the 2008 global financial meltdown and then the Eurozone sovereign debt crisis, this “compounded the problem for all financial institutions.” However, like BBK the other commercial retail banks in Bahrain were able to weather the storm and also stayed profitable, commented Mr Bucheery who is also chairman of the Bahrain Association of Banks.
“The most important element of a crisis is liquidity management. All the commercial banks in Bahrain had strong liquidity throughout the period which enabled them to continue doing business without too much concern,” he said. “If anything, at BBK we were suffering from high rather than tight liquidity.” Bank liquidity had climbed as the need for loans fell as investors pulled back on project implementation and luxury goods purchases. Most banks opted to keep excess liquidity at the CBB, or top rated institutions, he said.
As political tensions heightened last year around 4,000 protestors lost their jobs. Their ability to repay debts was hit, and banks had to take provisions on these impaired consumer loans. However, they should now be able to recoup the provisions after the authorities decreed that workers be reinstated, notes Mr Bucheery. While sectarian tensions continue to simmer, protests this year have been contained and bank operations have proceeded unhindered. The first few months of the year brought improved conditions for BBK and other domestic banks, said Mr Bucheery. “This looks like a signal that 2012 will be the start of a strong recovery,” he asserted, noting that economic growth for 2012 is estimated at around 5% compared to 2.2% last year. But he remained cautious, saying “I don’t want to jump to conclusions prematurely.”
While the global nature of finance means that Bahrain’s commercial banks are not completely isolated from the ongoing European sovereign debt crisis, BBK takes some comfort from having reduced its exposure to this region at the beginning of 2010. GCC money has generally flowed back from Europe and is contributing to the increased liquidity in Bahrain’s banking sector. BBK saw its portfolio impaired in 2008-09 by exotic European investment products, and thereafter decided to go back to the “ABC” of banking, explains Mr Bucheery. “For us that is the local market, our corporate clients, and GCC countries we know and can cover easily from Bahrain,” he added.
BBK’s Islamic arm, Cappinova, which is a wholesale banking subsidiary with $125mn in paid-up equity, is largely focused on the GCC private equity, asset management and corporate finance sectors. Two years ago 3-4% of BBK’s loan and investment portfolio was in GCC countries, and today this has climbed to 20%. However, it will be difficult to grow at this rate in future he concedes, given that BBK will need to compete with larger GCC institutions. BBK is Bahrain’s sixth largest commercial bank, but in the Gulf it was ranked number 50 in terms of equity in 2010 by London-based Darien Middle East’s study published in October, coming in behind larger lenders in Saudi Arabia, UAE, Kuwait and Qatar (MEES , 10 October 2011).
Nevertheless, BBK has helped finance a number of projects in Saudi Arabia, including the airport expansion at Jiddah, and train stations in Jiddah, Madinah and Mecca. It has also invested in GCC bond issues, in both in the primary (at issuance) and secondary markets. Some of the secondary market assets were offloaded by European banks in order to comply with the more rigorous Basel III banking regulations. This included paper from financial institutions and the hydrocarbon-related sector, such as bonds out of Qatar.
Asked about his plans for hydrocarbons, Mr Bucheery said that BBK is keen to provide funding to this sector. “Being in a region which is dependent on the hydrocarbon sector and oil in particular, we will definitely be involved as a major player in any project of this nature that comes to the market.” However, he explained that price remains a consideration. “Banks can no longer lend money for 15-20 years for project finance at very thin margins,” he said, noting that BBK will have to balance the availability of liquidity versus the tenors of these loans.
The pullback of international banks, be it due to their elevated cost of funding, or need to refocus as a result of regulatory pressures, has increased opportunities for Gulf banks in the project finance sector. In January Bahrain-based real estate and development company Naseej signed an agreement with the Bahraini government to build 4,100 housing units, costing BD208mn ($550mn). In the boom before the global crisis this public-private partnership (PPP) would probably have been underwritten by international banks, with the local banks only coming in at the syndication level. “Today local banks are being called on to arrange these deals and to be major players in them,” said Mr Bucheery, noting that the domestic bank liquidity will allow the transaction to go ahead without international banks. BBK is providing $35-50mn worth of financing for the deal.
Bahrain’s real estate market went through a steep downturn in the wake of the global recession and half-completed buildings can still be seen in Manama. The problems negatively impacted some domestic banks’ profitability. However, the CBB provided early warnings about overheating and commercial banks like BBK were not overly exposed to the sector, said Mr Bucheery. He sees stability coming back into this market and believes the worst is over.
The commercial banks are well positioned to take advantage of a measured, but expected upturn in Bahrain’s economy. Unlike many international banks, they do not need to offload assets in order to comply with the Basel III banking regulations, which are being implemented in a phased manner from 2012 through to 2018. While the new regulations are tough, the CBB has been working on them for some time. “As chairman of the Bahrain Association of Banks, I can say with a good degree of confidence that most of the banks in Bahrain are ready,” Mr Bucheery reveals, adding that an initial CBB assessment has not discovered any major problems. The CBB has stipulated that Bahrain banks have a capital adequacy of 12% which is above the current Basel II regulations. BBK’s capital adequacy is nearly 15%, and it is carrying no subordinated debt on its books. Basel III negates subordinated debt benefits, and in order to comply ahead of time, in November last year BBK converted it into a senior bond, offering an uplift in the coupon and receiving an 85% participation from its investors.
© Copyright MEES 2012.
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