Paris - Moody's Investors Service has assigned Baa1 long-term and Prime-2 short-term local and foreign currency issuer ratings and a D+ bank financial strength rating (BFSR) to Bahrain Islamic Bank B.S.C. (BisB). The rating outlook is stable. This is the first time Moody's has assigned ratings to an Islamic bank in the Kingdom of Bahrain.
"Moody's ratings for BisB recognise the rapid catch-up process the bank underwent from 2004 to 2007, recording a high compounded annual growth rate (CAGR) in assets of 37%. BisB had previously leveraged its strong brand and sound reputation to only a limited degree, but during the last two years it implemented major organisational changes and a committed hiring programme that resulted in senior, experienced officers joining the bank in recent years," explained Anouar Hassoune, lead analyst at Moody's for BisB.
In 2005, Kuwait-based The Investment Dar (TID) acquired 40% of the bank's shares. Given the current uncertainty with regard to whether TID will remain BisB's reference shareholder, Moody's ratings for the bank do not factor any support from its Kuwaiti parent. Moody's notes that, more recently, BisB has positioned itself with a new brand identity and unveiled its new logo, while simultaneously increasing its capital through a rights issue to existing shareholders, which brought BD84.9 million (USD222 million) of fresh capital. By year-end 2007, BisB's equity base had more than doubled from end-2006.
The D+ BFSR -- which maps to a baseline credit assessment of Ba1 under Moody's Joint Default Analysis methodology -- reflects BisB's growing franchise as Bahrain's leading Islamic commercial bank, strong financial metrics across the board, good asset quality, strong capitalisation and ample liquidity. The rating is, however, constrained by single-name, sector, business and geographic concentration risks, rapid credit growth in the recent past and the foreseeable future, some degree of investment risks, as well as a still imbalanced funding continuum heavily reliant on short-term customer deposits, which gives rise to both maturity mismatches and displaced commercial risks.
The BFSR is also constrained by the bank's very recent turnaround as a more dynamic institution, its small absolute size, and its lack of diversification, which should be viewed in the context of the still developing nature of the bank's enterprise risk management architecture.
"The D+ BFSR also captures the restrictions that Islamic banks face in managing their liquidity, growing competition in the domestic, regional and international Shari'ah-compliant banking markets, as well as the reputation risks to which Islamic banks tend to be subject. Nonetheless, Moody's recognises that BisB has demonstrated its capacity to weather the current financial stress, especially by maintaining ample asset liquidity cushions," Mr Hassoune said.
Going forward, Moody's expects that BisB's net intermediation spreads, which remain very high, will continue to decline as the bank expands its credit leverage (which is low at this stage) and gradually replaces direct investments with lending exposures. However, profitability (which reached stellar levels in recent years) is unlikely to suffer from such a shift in asset composition, given that its still robust credit growth (i.e. its evident race for volumes) and increased entrenchment in the lucrative retail segment should support its future earning streams, in Moody's view. The rating agency also expects that BisB's currently strong efficiency and limited provisioning charges will continue to contribute to high net operating income. Capital ratios will likely decline with the planned growth in risk assets, but not to a degree that would exert pressure on the ratings. Asset growth is expected to slow somewhat given the current difficult market conditions locally, regionally and internationally.
Moody's assesses the probability of systemic support for BisB from the authorities in the Kingdom of Bahrain in case of need as very high, given the bank's status as one of Bahrain's flagship Shari'ah-compliantfinancial institutions, as well as its importance as a fast-growing domestic retail deposit-taker. Therefore, the bank's local and foreign currency issuer ratings are Baa1/Prime-2 -- which represents an uplift of three notches from its baseline credit assessment of Ba1, itself a measure of BisB's standalone financial strength derived from the BFSR.
The outlook on all of BisB's ratings is currently stable. An upgrade of the bank's BFSR and/or issuer rating is possible in the event of significant asset and business expansion that leads to further operating diversification, improvements in the granularity of the financing and investment portfolios, and a further strengthening of the bank's franchise. The BFSR and/or issuer rating might also be raised if the mix of funding sources gave more space to term financing as an alternative to the bank's binary approach between capital and customer deposits, and/or if the institution's risk monitoring infrastructure were further enhanced. Moody's believes that the bank's current BFSR and issuer rating carry some upside potential in the medium term.
Conversely, the BFSR and/or issuer rating could be lowered in the event of deteriorating profitability, decline in asset quality, and/or a sudden and sharp tightening of the bank's liquidity profile or capitalisation resulting from a growth pace far exceeding expectations and plans.
Downward rating pressure would also arise if reputation or displaced commercial risks materialised. Such scenarios appear unlikely in the medium term.
The principal methodologies used in rating BisB are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology, published in February and March 2007, respectively, and available on www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory on Moody's website.
Bahrain Islamic Bank is headquartered in Manama, Bahrain, and reported total assets of BD874 million (USD2.3 billion) at 31 December 2008.
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For more information, please contact:
Paris
Anouar Hassoune
VP - Senior Credit Officer
Financial Institutions Group
Moody's France S.A.
Journalists: 44 20 7772 5456
Subscribers: 44 20 7772 5454
Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
Journalists: 44 20 7772 5456
Subscribers: 44 20 7772 5454
© Press Release 2009
