Outlook Stable

Fitch Ratings-Dubai/London-19 March 2012: Fitch Ratings has affirmed Bahrain-based BBK's Long-term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook, Short-term IDR at 'F3', Viability Rating (VR) at 'bb+', Support Rating at '2' and Support Rating Floor at 'BBB-'. A full list of rating actions is below.

BBK's IDRs and Support Rating reflect Fitch's view of a high probability of support from the Bahraini authorities if required, given its importance to the banking system and its 32% ownership by the government. IDRs are, therefore, sensitive to any change in the creditworthiness of the sovereign or Bahrain's propensity to support BBK. The Stable Outlook reflects the Outlook on Bahrain's sovereign ratings.

In Fitch's view, the high probability of support from Bahrain would extend to subordinated debt. Therefore, the subordinated debt rating is notched off BBK's Long-term IDR rather than the typical notching from the VR applied in countries outside the region.

BBK's domestic franchise generates multiple earnings streams, but operating profitability remains modest. This constrains BBK's VR, particularly as it provides limited loss absorption capacity at a time when impairment charges are running at a high level and there is a risk, although not Fitch's base case, that social unrest could worsen and impact the real economy. BBK is seeking to mitigate the pressure on its core earnings through diversification strategies, which Fitch views as positive but unlikely to significantly benefit the bank in the near term.

Loan growth increased in H211 on the back of the government's economic stimulus, which together with a strong deposit increase has led to net interest income rising, while the margin remained flat at 2.7%. BBK has little flexibility to rein in costs due to its expansion focus.

Fitch expects that asset quality may deteriorate further after BBK's non-performing loans (NPLs) and restructured loans both rose moderately in 2011 due to the disruption to the economy and the weakened private sector. Its NPL ratio of 9.1% at end-2011 is high by regional standards, although adequate reserve and collateral coverage are beneficial to the VR. High loan concentration by sector (particularly to real estate) and borrower pose additional challenges to asset quality.

Fitch considers BBK's funding and liquidity as strong overall. BBK's funding is mainly sourced from customer deposits reflecting its position as a major Bahraini bank. Deposits grew by a significant 30% partly due to a 'flight to quality' following the unrest in H111 with both domestic retail and institutional deposits up yoy. Its largest depositors include the governments of Bahrain and Kuwait, owing to its strong ownership factors. These deposits are considered stable by management and have proven to be so over time. BBK's funding mix is fairly diverse, including inter-bank deposits and term funding. Balance sheet liquidity is healthy, supported by government bond holdings and with a Fitch calculated gross loans/deposit ratio of 73% at end-2011.

BBK's Fitch core capital ratio declined to 13% at end-2011 (2010: 14.4%), demonstrating that modest profitability is not supporting loan growth. Given the moderate potential for weakened asset quality during a mild stress because of its loan exposure to the real economy, Fitch considers capitalisation to be adequate but not strong and BBK's VR could face downward pressure if the ratio declines further.

BBK offers retail and commercial banking through a wide domestic network and has a presence in Kuwait, India and Dubai. Bahrain's 32.1% stake is held through the state social insurance and pension fund organisations. Kuwait holds 18.7% through the Kuwait Investment Authority. BBK has the second-largest domestic market share in Bahrain and its strategy is to further expand retail banking and financial services in Bahrain as well as increasing corporate banking regionally and in India.

The rating actions are as follows:

BBK

Long-term IDR affirmed at 'BBB-'; Stable Outlook

Short-term IDR affirmed at 'F3'

Viability Rating affirmed at 'bb+'

Support Rating affirmed at '2'

Support Rating Floor affirmed at 'BBB-'

Senior unsecured debt affirmed at 'BBB-'

Subordinated debt affirmed at 'BB+'

Contact:
Primary Analyst
Mahin Dissanayake
Director
+971 4 4081806
Fitch Ratings Ltd,
DIFC, Gate Village,
GV07 Level 1, Office 2,
PO Box 506527,
Dubai

Secondary Analyst
Philip Smith
Senior Director
+44 20 3530 1091
Committee Chairperson
Bridget Gandy
Managing Director
+44 20 3530 1095

Media Relations: Michelle James, London, Tel: +44 0203 530 1574, Email: Michelle.James@fitchratings.com.

Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Rating Bank Regulatory Capital and Similar Securities' dated 15 December 2011,'Global Financial Institutions Ratings Criteria', dated 16 August 2011, and 'Evaluating Corporate Governance', dated 13 December 2011, are available at www.fitchratings.com.

© Press Release 2012