Cause and effect: Despite a tough 2011, global and regional issues remain a greater concern for banks than local ones

In early 2012, as the Kingdom’s banks began to publish their financial results for the previous year, it became apparent that the political unrest of 2011 did not have a significantly adverse effect on their performance. Still, the unexpected developments of that year did present the domestic banking sector with a number of short-term challenges, and has compelled CEOs in the industry to address investors’ concerns regarding the long-term prospects of their business.

CREDIT RATING: Of most concern to the banking sector in the first half of 2011 was the downgrading of Bahrain’s sovereign debt by all three major ratings agencies: from A2 to A3 by Moody’s, and subsequently to Baa1 with a negative outlook; from A/A1 to A/A2, and finally to BBB by Standard & Poor’s; and a two-notch drop from A- to BBB by Fitch. In essence, the actions of the three agencies moved Bahrain’s credit rating from upper medium to lower medium, which, although still within the investment-grade bracket, was to have ramifications for Bahrain’s banks. As a direct result of the ratings changes the Arab Banking Group, Ahli United Bank, BMI Bank and the Bahraini branch of Arab Bank all suffered credit downgrades and were placed on a negative watch, a development which had the potential to raise borrowing costs for some of the country’s largest financial institutions. While the rationale behind the changes was founded on the apparent political uncertainty of early 2011 and the rise in the breakeven oil price on the back of increased infrastructural and social spending, many in the sector thought that the revisions were made too hastily.

Indeed, as the year progressed there was some acknowledgement of the increasing economic and political stability by the agencies. Fitch removed the country from its credit watch negative list in August in light of the fact that “near-term risks to the political and economic outlook” had abated. Bahrain’s low public debt as a proportion of GDP (about 30%), the avowals of support from its Gulf neighbours and the relatively calm passing of the February 14, 2012 anniversary of the protests have combined to reassure the markets as to Bahrain’s long-term creditworthiness.

IMPACT ON BUSINESS: Another consequence of the political unrest which presented a challenge for Bahrain’s banks in 2011 was the slowdown in business in February and March, particularly in the retail sector. Hotels and shopping centres were hit by a sharp reduction in traffic from neighbouring Saudi Arabia, while road closures and traffic disruption as a result of security measures negatively affected business across a range of sectors. The possibility that such business interruptions would impair the ability of companies to honour their obligations to lenders was a concern for the banking sector, and in some cases remains one.

Bahrain’s bankers point out that the non-performing loan (NPL) problem pre-dates the political unrest of 2011, and stems from the global economic crisis that began in 2008. In 2009 NPLs for conventional retail banks amounted to 6.2% of gross loans, but by 2010 loan delinquency had decreased to 5.9%, according to the Central Bank of Bahrain’s fiscal stability directorate. Year-end results for conventional banks published in early 2012 suggested that the uptick in NPLs feared by some has not materialised and, while certain segments of the economy remain affected by reduced inward traffic, this particular consequence of the 2011 disturbances has yet to significantly affect balance sheets.

“The crisis did not have as big an impact as some feared. Liquidity is coming in from the GCC, government initiatives are continuing, Formula 1 returns to Bahrain in 2012, which is very important, and both loans and deposits have achieved double-digit growth, which I would say is better than decent,” VSM Raju, senior manager and financial controller at National Bank of Bahrain, told OBG. The short-term challenges posed by the political unrest in Bahrain have not become a significant threat to the banking sector. Locally incorporated banks cite the effects of the global recession and regional geopolitical issues as greater concerns in terms of their performance. The smaller operators facing difficulties with their business models have been doing so since 2009, while a jump in borrowing costs in January 2012, which saw yields on Bahrain’s 2014 sukuk rise eight basis points, was attributed to a threat of new sanctions on Iran by the US and the subsequent Iranian threat to close the Strait of Hormuz to shipping. Global and regional events, say Bahrain’s bankers, are of more concern to them than internal strife now.

Addressing the long-term ramifications of the political unrest, Bahrain’s banks can point to several encouraging factors. Even during the height of the crisis, there was no liquidity problem, and going into 2012 commercial banks were in fact complaining of high liquidity. “The banks hold a high amount of liquidity and they are trying to get rid of it. Either they can interbank or put it in the CBB at a low rate, so the desire to lend is present,” Jamal Ali Al Hazeem, the CEO of BMI Bank, told OBG.

“The reason for [the liquidity] is that customers are still confident in the system; they keep their money in the banks. And a huge amount of money has come from other countries… Saudi, the UAE, Kuwait, so this really cements the confidence of the Bahrain banking system and the high regard the CBB is held in,” Abdulkarim Ahmed Bucheery, CEO of BBK and chairman of the Bahrain Association of Banks, told the local press.

Of equal importance is the fact that the foreign banks in Bahrain that have helped to establish it as the regional financial hub have not, as some feared, moved their operations to other financial centres in the Gulf. Of the four foreign banks that announced their intention to leave Manama in 2011, three of them stated that they were for reasons unrelated to local politics. Banks which have built up their Gulf business from a base in Bahrain have generally been vocal in their support for the country and their intention to remain there.

“Look at it this way. We’ve been here for 92 years, and so far Bahrain has had one year of problems. This is not derailing our strategy,” Hassan Jarrar, the newly appointed CEO of Standard Chartered Bahrain, told OBG. Similarly, regional service providers that have made Bahrain their operations centre continue to invest in their Manama infrastructure. In 2012 Arab Financial Services, one of the region’s leading payment processing providers, installed the first IBM z114 computers in the Middle East in its Manama centre, for example.

OPPORTUNITIES TO COME: Banks in Bahrain see the government’s acknowledgement of the social concerns raised by the protestors as significant for their business. Recent events have pushed the question of affordable housing to the top of the government’s agenda, and the lending opportunities inherent in this programme is of great interest to banks keen to make use of their underutilised liquidity. At the start of 2012 Bahrain inked the first deal for the provision of low-cost housing via a public-private partnership model in the Middle East. Such arrangements, and other state initiatives aimed at developing infrastructure, may well prove bountiful for Bahrain’s banks for years to come.