How Bahrain’s capital markets are bouncing back from the pandemic

Bahrain’s capital markets have navigated challenging times in recent years, as the world has faced the Covid-19 pandemic, high volatility in energy markets and the fallout from Russia’s invasion of Ukraine. Despite these challenges, the kingdom continues to exercise an important influence on regional capital markets, attract investors and provide a sound platform for listed companies to raise funds. Indeed, there have seen successful bond issuances – both conventional and sukuk (Islamic bonds) – backed by further improvements in regulatory and oversight standards, as well as increased digitisation. The capital markets are now looking forward to renewed foreign interest, while a return to economic growth and an enhanced project pipeline bode well for robust gains in the years ahead.

Oversight

The Central Bank of Bahrain (CBB) is the sector’s regulatory and supervisory authority, as it is for all financial services in the kingdom. The CBB exercises this authority through its Capital Markets Supervision Directorate (CMSD), with the regulations it enacts stated in Volume 6 of the CBB rulebook. The CMSD also follows international standards, including those of the International Organisation of Securities Commissions. The directorate oversees the kingdom’s only licensed stock exchange, the Bahrain Bourse (BHB), a self-regulatory organisation that dates to 2010, when it was established as the successor to the Bahrain Stock Exchange, which was originally set up in 1987.

Other key milestones include the BHB’s 2010 restructuring into a closed shareholding company; the upgrade to a Nasdaq OMX trading platform in 2014; the BHB’s 2015 listing of the Middle East’s first tradeable sukuk; the 2016 launch of the Treasury Bills Market; and the 2017 listing of the first real estate investment trusts (REITs) and the BHB’s fully owned subsidiary, Bahrain Clear, which is the bourse’s central depository, registry, clearing and settlement entity. That year also saw the launch of the Bahrain Investment Market (BIM), a platform for fast-growing, and often new, companies.

Collaboration & Strategy 

In July 2021 the BHB adopted the Global Industry Classification Standards (GICS) for its listed companies. The BHB is a member of the Arab Federation of Capital Markets (AFCM), the World Federation of Exchanges, and the Africa & Middle East Depositories Association. For 2022 the BHB has taken on the rotating presidency of the AFCM. In addition, the bourse is a partner exchange member of the Sustainable Stock Exchanges initiative, and in 2020 launched voluntary environmental, social and governance (ESG) reporting guidelines for listed companies and other stakeholders. This saw the percentage of listed companies that file sustainability reports increase from 7% in 2019 to 33% by the end of 2020, with these outfits representing 78% of the BHB’s total market capitalisation. The following year the BHB launched the “Investor Relations Best Practice Guide” for listed companies.

The BHB and Bahrain Clear are now linked to the Abu Dhabi Securities Exchange, the region’s second-largest bourse, by a cross-border cooperation agreement signed in November 2021. The agreement aims to pave the way for dual listings, exchange-traded funds and fuller, more seamless market access, boosting the depth and breadth of both exchanges.

In January 2022 Bahrain Clear signed a memorandum of understanding with Muqassa, the Saudi securities clearing company owned by the Saudi Tadawul Group. The move is designed to strengthen cross-border cooperation and connectivity, as well as facilitate training and the sharing of expertise.

Mentoring is behind many other BHB initiatives, such as the Capital Markets Apprenticeship Programme, which gives training to selected interns. This dovetails with the Economic Recovery Plan launched in December 2021 and the Financial Services Development Strategy 2022-26, the latter of which highlights job creation in the sector and sets a target of 3000 trainees per year in financial services by the end of 2024. Boosting financial literacy and awareness of the role capital markets can play in business and entrepreneurship is central to the strategy. It also highlights financial technology (fintech) and regulatory development, including green finance.

Structure

The BHB provides the opportunity to trade shares, mutual funds, bonds and sukuk, REITs and Treasury bills. This can be done via the main market or BIM – which has no market cap requirements and a minimum of BD250,000 ($663,000) in paid-up-capital – or by listing on the main exchange.

The BHB has two indices, the Bahrain All Share Index (BHBX) and the Bahrain Islamic Index (BIX). Since July 2021, when the BHB reorganised its groupings according to the GICS classifications, the larger former index has been divided into seven sectors. These are: materials, with one company listed in December 2021; industrials, with three companies; consumer discretionary, with five companies; consumer staples, with four companies; financials, with 22 companies; communications, with three; and real estate, also with three. The exchange lists one foreign company, Bank Muscat, and had two closed companies – SICO and United Paper Industries – until the latter delisted in 2021.

The financial services sector is the most well represented, which is reflected in its value. At the end of 2021 the sector had a combined market cap of BD8bn ($21.3bn), or 74.3% of the total, with materials the next largest, at BD1.14bn ($3bn). Communications had a market cap of BD1.06bn ($2.8bn), followed by consumer discretionary (BD180.6m, $479m); consumer staples (BD146.6m, $388.8m); industrials (BD145.3m, $385.3m); and real estate (BD110.7m, $293.6m).

As of the end of 2021 there were 10 registered brokers on the BHB, with the largest in terms of value traded being SICO, which accounted for 59.6% of the total. Gulf Securities Company was the second largest, with 19.2%, while Mubasher Financial Services was in third place, with 8.3%. The top-two brokers accounted for almost 80% of total trades by value.

Equities Performance 

In 2019 the BHBX climbed some 20.4%, with total market cap reaching BD10.1bn ($26.9bn) by the end of the year, despite declines in both average share value and volume during the previous 12 months. However, with the spread of Covid-19 and the start of pandemic measures in early 2020, the world’s stock exchanges suffered their worst daily falls since the 2008 global financial crisis.

Starting 2020 at 1659.7, the low point for the BHBX was reached in May 2020, after which it hovered around the 1270-point mark until recovery began in August. By the end of 2020 the index was back up at 1489.8, representing a year-on-year decline of 7.5%. The average value of shares traded was down 25.7%, while the average volume increased by 4.5%.

The BIX followed a similar pattern, with a sharp decline followed by a steady, albeit incomplete, recovery. Ending 2019 just above 760 points, the BIX was down 14.5%, at 650.2 points, by the end of 2020.

Total market cap also fell over the year, by 8.5%. Using the sector categorisation used by the BHBX at the time, the banking, investment, and hotels and tourism sectors saw the worst falls, in terms of trading value and volume. Insurance, services and industrials, however, recorded relatively strong performances, with the services segment recording growth of 25.5% on the BHBX.

The government was far from idle during this public health crisis and its unprecedented economic knock-on effects. Two crisis packages were launched: one for $11.3bn in March 2020 and a second package of $1.3bn in June 2021. The CBB also slashed its interest rates, starting in March 2020. A repayment holiday for bank loans was instituted, initially for six months, but this was later extended through the end of 2021.

These measures helped businesses stay afloat, while having an impact on listed companies and the BHBX as well. A recovery began in late 2020 and continued into 2021, with the BHBX closing 2021 up 20.6% on the 1797.3 points recorded at the end of 2020. This, in turn, was an increase of 8.2% from its 2019 close, signalling that the losses of the previous two years had been erased. The BIX rose by 15.6% to close out 2021 at 751.7 points – just 10 points shy of where it had started prior to the pandemic. At the same time, market cap rose by 16.6%, from BD9.3bn ($24.7bn) at the end of 2020 to BD10.8bn ($28.6bn) at the end of 2021.

Given that categorisation changed in mid-2021, no direct comparison can be made between sector performances, but companies in areas such as hospitality and tourism continued to see share prices decline, while those in areas of revived economic activity increased. An example of the latter was Aluminium Bahrain (Alba), which benefitted from a worldwide surge in aluminium prices to see its shares go from a BD0.18 ($0.48) loss in 2020 to a BD0.29 ($0.76) gain in 2021.

Overall, the number of companies that saw gains in 2021 was the same as the number of those that declined – 18 – while eight remained unchanged. This was an improvement from 2020, when 22 stocks increased and 15 decreased, with five remaining unchanged. There were two delistings in 2021, with the total number of listings as of end-2021 at 42. That year most trading occurred in the financial sector, which accounted for 75.6% of total shares traded on the BHB.

In terms of the top companies by market capitalisation, the pandemic period ushered in relatively little change in the league table. Ahli United Bank was at the top both years, with its market cap rising from BD2.8bn ($7.3bn) at the end of 2020 to BD3.6bn ($9.4bn) at the end of 2021, while National Bank of Bahrain was second, with its market cap rising from BD1.1bn ($2.8bn) to BD1.2bn ($3.3bn) over the same period. Telecoms outfit Bahrain Telecommunications Company was third in 2020, with a market cap of BD997.9m ($2.65bn), falling to BD969.6m ($2.57bn) in 2021, while Alba went from fourth place in 2020, with BD728.5m ($1.9bn), to third place in 2021, with BD1.14bn ($3bn).

Foreign participation in Bahrain’s capital markets was negatively impacted by the pandemic, mirroring a more general move away from emerging markets by international funds. In 2019 trading by non-Bahrainis accounted for 39.7% of the total value traded; this decreased to 25.2% in 2020. It remained steady in 2021, however, ending the year at 25%. There were signs of a pick-up heading into 2022, with 26.1% trades by value accounted for by non-Bahrainis in January.

New Listings

The BIM saw its first listing – by fintech firm Sprinkle Holding – in December 2019, just before the start of the pandemic. In the years that followed the BIM was characterised by a lack of new listings due to the uncertainties of the pandemic. In December 2021, however, the CBB announced that as part of its development strategy for financial services, it would target the listing of five promising companies on the BIM by 2026.

Looking ahead, the government has stated its aim of reducing its holdings in publicly traded companies. As part of that commitment, Sheikh Khalifa bin Ebrahim Al Khalifa, CEO of the BHB, said in December 2021 that five government-owned companies were targeted to be listed, including some in the logistics sector. Such privatisations and part-privatisations are part of the updated Fiscal Balance Programme (FBP), which seeks to reduce public spending and boost the role of the non-oil private sector in the economy.

Debt Market Performance

Going into the pandemic, 14 bonds and sukuk, and 34 Treasury bills were listed on the BHB. There were three issuances in 2020: two government development bonds, in May and July for BD300m ($795.8m) and BD150m ($397.9m), at 6% and 4.5%, respectively; and a government sukuk in July, for BD125m ($331.6m), at 4.5%.

In addition to six more government development bonds – two of which were US dollar-denominated, for $150m and $200m – several major sovereign issues took place in 2021 as well, motivated by the kingdom’s financing needs. Bahrain has been trying to bring the public debt into balance since launching the FBP in 2018; the initial deadline for achieving this was 2022, but the pandemic necessitated a fiscal loosening to tackle the health crisis and its economic impact.

To help finance this, Bahrain issued $2bn in three bond tranches in January 2021. The package consisted of a $500m, seven-year tranche, at a rate of 4.25%; $1bn in 12-year bonds, at 5.25%; and $500m in 30-year notes, at 6.25%. In November 2021 there was a second bond sale, for $2bn, with half of this taking the form of a 7. 5-year sukuk, at 3.875%, and half in 12.5-year conventional bonds, at 5.625%. In 2021 there were regular 12-month, six-month and three-month Treasury bill issuances, with discount rates varying from a high of 2.71% for January’s 12-month Treasury bill, to a low of 1.4% for three-month Treasury bills in October and November.

Going forwards, 2022 will likely see a mixed picture for new sovereign issuances. While the public debt remains significant – at 133% of GDP in 2020 – as oil prices and revenue boomed in the second half of 2021 and into the first quarter of 2022, government finances have improved markedly. At the same time, the government announced a revised FBP in October 2021, which aims to achieve fiscal balance by 2024.

These factors mean that the need for new sovereign bond issuances should decline. The market continued to see some activity, but with the CBB issuing a BD26m ($69m) short-term ijara (leasing) sukuk in March 2022. That month was also the subscription period for the BD150m ($397.9m) issue of three-year government development bonds, at a rate of 4.2%.

In February 2022 Bahrain-headquartered GFH Financial Group rolled out and seeded a $100m diversified sukuk fund, bundling together sovereign, quasi-sovereign and corporate sukuk, mainly from the GCC region. This illustrates the growing interest in sukuk, as more Islamic countries pursue their own Islamic finance development agendas, which often include requirements by banks to diversify funding into sharia-compliant products. The CBB ijara sukuk issue, for example, was oversubscribed by approximately 366%.

Green bonds and sukuk represent another noteworthy capital markets trends. In October 2021 Bahrain’s Gulf International Bank announced a $625m sustainability-linked syndicated loan, and in January 2022 GFH’s infrastructure spin-off fund, Infracorp, disclosed plans to issue a $800m perpetual green sukuk. The funds raised will be eligible for financing the company’s ESG goals, as this trend takes a firmer hold in the region and beyond. The accelerated greening of finance dovetails with the CBB and the BHB’s 2020 move to implement voluntary ESG reporting in the kingdom. In June of that year the bourse issued the “ESG Reporting Guide”, with third-party reporting methodologies to assist listed companies with integrating sustainable criteria into their business operations and better meet the expectations of investors who are increasingly looking at ESG considerations when making decisions.

Asset Managers

The kingdom’s asset-management segment has some strong participants, with three Bahraini asset-management outfits listed in the first-ever Forbes list of the top-30 Middle East regional asset managers, issued in December 2020. These three were led by Investcorp, which came second in terms of total assets under management (AUM), after Saudi Arabia’s NCB Capital. Investcorp had a total AUM of $35bn in June 2020. The other two Bahraini asset managers listed by Forbes were GFH Financial Group, ranked ninth overall and with a total AUM of $12bn, and SICO, which ranked 21st, with a total AUM of approximately $4bn. Many other financial services outlets have asset-management divisions in Bahrain, counting international banks such as Citi and UBS among them.

Within the BHB, there were three mutual funds operating as of the end of 2021, down from nine when the pandemic began. The three remaining mutual funds were the Markaz Arabian Fund, the NBK Gulf Equity Fund and the NBK Qaar Equity Fund.

Delistings in the 2020-22 period included Investcorp, which departed in July 2021 after almost four decades of trading as a public company. Investcorp cited low trading volume and a shareholder preference for private status as the rationale for the move. June 2021 saw SICO delist four of its funds from the BHB – the Khaleej Equity Fund, SICO Kingdom Equity Fund, SICO Gulf Equity Fund and SICO Fixed Income Fund. No reasons were given for this delisting, but investors were reassured that the move would not impact SICO’s adherence to regulatory requirements and reporting standards.

This wave of delisting was not exclusive to Bahrain; other GCC and Middle Eastern exchanges witnessed similar activity. Public scrutiny and high accounting standards, along with lower-than-usual trading volumes, have usually been the rationale for these moves, with exchanges in the region hoping that increased activity may draw such funds back in the future.

Outlook

Despite uncertain global conditions, the years ahead look likely to be one of continued growth and consolidation for Bahrain’s capital markets. Indeed, with oil prices jumping to around $139 per barrel as of early March and global economic activity in recovery, an improved macroeconomic environment should help to generate activity on the bourse as well. A healthy pipeline of initial public offerings are expected to help establish the foundations for attaining emergin market status. At the same time, the CBB and the BHB’s efforts to encourage more companies to list, combined with educational and promotional activities, should serve to deepen and widen the bourse.

An improved macroeconomic climate, in combination with the Bahraini government’s continued commitment to pursuing fiscal austerity, may ultimately lead to less activity in the debt market. Nevertheless, the continuing popularity of sukuk, in particular, should see investor appetite for such instruments continue to grow in the coming years. For many companies that work in hospitality, retail and other high-contact services – sectors that were the most heavily impacted by the pandemic – the period ahead offers an opportunity to make up for recent losses. The BHB is one avenue that these companies may be willing to explore in order to refinance and recover. While there is still ground to be made up in Bahrain’s capital markets, the year ahead presents the chance to both restore and progress.