Bahrain banks shine despite writedowns
Manama, May 28, 2008
Bahraini banks maintained healthy profitability last year, despite major structured credit market-related losses at certain institutions, according to Fitch Ratings.
The performance of Bahraini banks benefited from its buoyant operating environment, reflected in estimated real GDP growth of seven per cent and high oil prices, leading to rising Gulf government spending.
However, threats to the economy could arise from rapid loan growth, a possible regional property market bubble, inflation and pressure on regional dollar currency pegs.
In the first quarter of this year, two major Bahraini wholesale banks, Arab Banking Corporation (ABC) and Gulf International Bank (GIB) suffered extremely large cumulative impairment charges, mainly for investments in structured investment vehicles (SIVs) and collateralised debt obligations (CDOs) with exposure to US subprime residential mortgage-backed securities.
These charges led GIB to report an operating loss of $758 million last year. ABC reported a 59 per cent decline in operating profits last year to $92 million, but an operating loss in the first quarter of this year of $563 million.
Given adverse market conditions, further writedowns for structured credit investments are possible, but are not expected to be as large as those already incurred, according to Fitch.
Both ABC and GIB maintained adequate levels of capitalisation through this turmoil due to capital injections from their shareholders.
GIB announced a $1 billion rights issue in the fourth quarter and ABC announced a $1 billion rights issue in the first quarter of this year.
BBK also suffered impairment charges last year of $64 million, mainly from SIV investments, but these charges were absorbed by operating profits and supported by additional capital from a rights issue.
Exceptionally large losses at ABC and GIB overshadowed generally healthy core operating profitability at most Bahraini banks last year, driven by rapid loan growth with generally stable margins, growth in fee income from rising business volumes, and steady cost efficiency, Fitch said.
This led most banks to report higher pre-impairment operating profits from core business lines. Despite rapid credit expansion, most banks continued to enjoy stable, satisfactory asset quality and low levels of loan impairment charges last year.
Nevertheless, rapid loan growth is a concern, with many banks reporting growth well in excess of 20 per cent last year. Problems are likely to arise when the credit cycle turns.
Most banks have exposure to the property market, where a possible asset price bubble could cause systemic problems, though the Bahraini market appears to be less overheated compared with certain other GCC markets.
The outlook for Bahraini retail banks such as Ahli United Bank, BBK and NBB remains good, the ratings agency says.
Profitability trends are expected to remain positive while asset quality and capital are sustained at satisfactory levels.
However, exceptionally large losses cause significant concern about ABC's and GIB's franchises, profitability, funding and prospects.-TradeArabia News Service