(The following statement was released by the rating agency)

Fitch Ratings-Dubai/London-October 18: Fitch Ratings has affirmed BBK B.S.C.'s (BBK) Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook. It has also affirmed the Viability Rating (VR) at 'bb-' and Support Rating (SR) at '3'. A full list of rating actions is at the end of this Rating Action Commentary.

KEY RATING DRIVERS

IDRs, VR

BBK's IDRs are driven by its standalone creditworthiness as reflected by its 'bb-' VR. The IDRs are also underpinned by potential sovereign support as reflected by the bank's Support Rating Floor (SRF) of 'BB-'.

BBK's VR is capped by the operating environment in Bahrain and, more specifically, by the Bahraini sovereign rating of 'BB-'. This reflects the fact that BBK is predominantly a domestic bank with significant exposure to the sovereign and the domestic operating environment. The VR also considers the bank's high impaired loans ratio, high concentration risk and only adequate capital ratios, but also its well-entrenched domestic franchise, adequate margins and consistent profitability.

BBK's franchise is reliant on a small and competitive domestic operating environment. BBK has limited competitive advantage compared with more geographically diversified peers. Nevertheless, BBK has a well-entrenched domestic retail and corporate banking franchise.

BBK's impaired loans ratio of 6.4% at end-1H18 is high. It has deteriorated since 2016 due to the impairment of some of the bank's large exposures. The operating environment in Bahrain is still challenging and might put additional pressure on the bank's asset-quality metrics. Reserve coverage of impaired loans of 102% at end-1H18 is adequate. High loan concentrations remain, albeit lower than at some Gulf Cooperation Council peers.

Fitch considers BBK's capital ratios as only adequate given the bank's weakening asset quality and high loan book concentration. The Fitch Core Capital ratio deteriorated to 14.3% at end-1H18 from 15.8% at end-2017, partially due to the revaluation impact on the investment securities portfolio. The Tier 1 regulatory capital ratio was higher at 17.2% at end-1H18, boosted by the bank's BHD86 million additional Tier 1 securities issued in 2016 to its shareholders. BBK's capital buffers remain exposed to high event risk and high loan concentration in a weakened operating environment. However, absent any severe credit events, we expect the bank's capital ratios to be maintained as loan growth is likely to be moderate.

BBK generates adequate margins (3.2% in 1H18, up from 2.9% in 2017) and consistent profitability (operating return on assets of 2.6% and operating return on equity of 17.9% in 1H18) through its well-established domestic franchise.

The bank is largely funded by customer deposits, which represented 82% of non-equity funding at end-1H18. The Fitch-calculated gross loans-to-deposits ratio remained adequate at about 76% at end-1H18, which is below the peer average. The deposit base is concentrated, similar to peers, with the 20 largest deposits representing 49% of the deposit base at end-1H18. These are mainly from Kuwaiti and Bahraini government entities, given the bank's ownership. Liquidity is further supported by a large stock of liquid assets that covered about 28% of customer deposits at end-1H18.

SR AND SRF

BBK's SR and SRF reflect a moderate probability of support from the Bahraini authorities, if required. This considers BBK's systemic importance as a major retail and corporate bank in Bahrain. In addition, the Bahraini government has a 32% stake in BBK via its social insurance organisation, which adds to Fitch's view on the sovereign's propensity to provide support to BBK.

Our view on support also considers the Bahraini authorities' high propensity to support domestic commercial banks, albeit with a weakened ability to do so. Fitch believes the probability of support is constrained by the Bahraini state's own creditworthiness, as reflected by the 'BB-' sovereign rating.

The Stable Outlook reflects the Stable Outlook on the Bahraini sovereign rating.

SENIOR DEBT

Senior debt ratings are aligned with BKK's IDRs.

RATING SENSITIVITIES

IDRs, VR, SR and SRF

BBK's Long-Term IDR would only be downgraded if the bank's VR and SRF were both downgraded. This would most likely result from a sovereign downgrade. Downside risk to BBK's VR may also arise from deterioration in asset quality or capitalisation.

An upgrade of any rating would require an upgrade of the sovereign rating.

A rating change linked to the sovereign is unlikely in the near future given the Stable Outlook on the sovereign.

SENIOR DEBT

The senior debt ratings are sensitive to the same considerations that might affect the bank's Long-Term IDR.

The rating actions are as follows:

BBK

Long-Term IDR affirmed at 'BB-'; Outlook Stable

Short-Term IDR affirmed at 'B'

Viability Rating affirmed at 'bb-'

Support Rating affirmed at '3'

Support Rating Floor affirmed at 'BB-'

Senior unsecured debt affirmed at 'BB-'

Contact:

Primary Analyst

Amin Sakhri

Director

+971 4 424 1202

Fitch Ratings Limited

Al Thuraya Tower 1, Office 1806

Media City

PO Box 502030, Dubai

Secondary Analyst

Tim Slater

Analyst

+44 203 530 1791

Committee Chairperson

Alexander Danilov

Senior Director

+7 495 956 2408

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria

Bank Rating Criteria (pub. 12 Oct 2018)

https://www.fitchratings.com/site/re/10044408

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/site/dodd-frank-disclosure/10048927

Solicitation Status

https://www.fitchratings.com/site/pr/10048927#solicitation

Endorsement Policy

https://www.fitchratings.com/regulatory

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