Despite losses in profit growth for some banks, overall the Bahraini banking sector did well in 2007. According to a recent report by the Central Bank of Bahrain (CBB), “Against the background of recently completed structural changes, domestic banking institutions (conventional and Islamic) show sound financial health, as rapidly expanding balance sheets are underpinned by high capital adequacy, low non-performing assets, plenty of liquidity, continued growth of earnings and stable ratings from accredited rating agencies.”
Despite this praise, prudent observers will keep their eyes on some of Bahrain’s bank portfolios that contain high concentrations of certain sectors. Further unchecked growth in the construction and real-estate sectors will leave some banks uncomfortably exposed.
Current difficulties in the industry include the recent structural changes implemented by the central bank, related to the CBB’s single license policy. Furthermore, it is worth noting that three wholesale banks have become retail banks, which has expanded the aggregate balance sheets of the retail banking sector considerably.
Total retail bank deposits were $49 billion at the end of September 2007, according to the CBB. The growth appears astounding when compared to the $18.4 billion recorded for the financial period ending in March the same year. Yet the growth was largely due to the previously mentioned restructuring process. Without the restructuring, deposits would have only reached $24.9 billion for the September report.
Retail deposits are readily available thanks to high liquidity and the nation’s banks enjoyed year-on-year growth in net profits of 78%. In terms of loan concentration, over 40% of banks’ loan books are in either the personal or the financial sector. Uniquely, the growing regional demand for credit has benefited Bahraini loan books as well. In fact, things are so good on this level that if loan growth becomes even more rapid, it could threaten the sector.
While things are rosy for most banks, not all is well in the kingdom. Most of the region’s banks avoided significant exposure to the subprime crisis, but a couple of Bahraini banks did see fall-out. Fitch Ratings reported “two major Bahraini wholesale banks, Arab Banking Corporation and Gulf International Bank, suffered extremely large cumulative impairment charges, mainly for investments in structured investment vehicles and collateralized debt obligations with exposure to US sub-prime residential mortgage-backed securities.” Those cumulative impairment charges lead to operating losses of $758 million for Gulf International Bank and a 59% decline in operating profits for Arab Banking Corporation in 2007.
The big three
There are three major banks on the Bahraini banking scene in terms of total assets. The largest is the previously mentioned Arab Banking Corporation, with assets of $32.7 billion. While this bank’s exposure to the America-based subprime crisis cut deeply into its bottom line, the banks was still able to record net profits of $125 million. The bank was able to keep its cash reserves high during the crisis thanks to injections from shareholders and it is anticipated that the write-downs are largely finished.
Second in terms of assets is Ahli United Bank with $23 billion on the balance sheet. This bank was the big winner in earnings for 2007 with $296 million in profit thanks to significant international activity in Kuwait, Oman, Qatar, Egypt and the UK.
The third largest bank in Bahrain by assets is Albaraka Banking Group with $10.1 billion in assets. Albaraka took down $144 million in profits for the year, as compared to $80 million the previous year.
Net profit of Bahraini banks ($ millions)
Total assets of Bahraini banks ($ billions)
Forecast
Real GDP growth is expected fall incrementally for both 2007 and 2008, while consumer inflation should remain relatively steady despite the country’s currency peg to the dollar. Bahraini banks should profit from continued high asset quality and liquidity in the country. Although the real-estate market is moving quickly and presents a minor threat to the sector, it is in much better shape than other, more overheated markets of the GCC. As long as a watchful eye is kept towards the unique local challenges and oil prices stay high, Bahraini banking should be in for another good year in 2008.
Country forecast
