Market capitalisation grows as Bahrain Bourse turns 25

With an 18.9% year-on-year increase in market capitalisation and a 17.2% hike in the Bahrain All-Share Index, 2013 was a positive year for the Bahrain Bourse. This positive trend continued into 2014 as well, with a 21.7% rise in market capitalisation to BD8.47bn ($22.45bn) at the end of September 2014 and a 23.63% increase year to date in the Bahrain All-Share Index, which ended the third quarter at 1476.02, exceeding highs last seen in early 2011.

Milestone Passed

On February 6, 2014 the Bahrain All-Share Index passed the 1300 mark for the first time since July 2011. The index continued rising as the year progressed, passing the 1400 mark on April 24th. By October it was at just over 1475, although it had cooled to around 1380 by mid-December. While this represents significant growth, it is still well below the high of 2902.68 reached on January 15, 2008, before the onset of the global financial crisis. In any case, these gains are creating confidence in the sector. “We have been trading above the psychological figure of 1300,” Ebrahim Jaffer Al Aradi, director of market control and members affairs at the Bahrain Bourse, told OBG in April 2014. “Most of the companies had good announcements in their annual reports for 2013 and I think globally there is light at the end of the tunnel.”

In terms of market capitalisation, the bourse passed another milestone in first-quarter 2014. Its value of BD7.85bn ($20.8bn) had not been beaten since the third quarter of 2008. Its market capitalisation for primary listings stood at almost $22bn in mid-December. Also, in the first quarter of 2014 the average private equity ratio broke into double digits for the first time in three years. It was 10.4 in the first quarter of 2014 and 10.52 in the first quarter of 2011.

Silver Jubilee

June 2014 marked the 25th anniversary of trading on the exchange, which began operating as the Bahrain Stock Exchange in 1989. Bahrain Bourse was established as a shareholding company in 2010. The official exchange was created after the collapse of an unofficial trading centre called the Al Jowhara Market and its equivalent in Kuwait, the Souk Al Manakh, in the 1980s.

In its early days, the Bahrain Stock Exchange operated manually through the Auctional Trading system. In 1999 the Automatic Trading System was introduced, and three years later legislative and regulatory control of the exchange passed from the Ministry of Commerce to the Central Bank of Bahrain (CBB). It became the first bourse in the region to list instruments such as preferred shares, bonds and their Islamic equivalents ( sukuks), and mutual funds.

In 2010 the exchange moved to its current headquarters in Bahrain Financial Harbour.

Performance

Performance of shares on the market is measured by three indices: the Bahrain All-Share Index; the Dow Jones Bahrain Index; and the Esterad Index. These three indices recorded growth of 17.2%, 23.6% and 15.2%, respectively, in 2013. There have been 47 equities listed on the bourse since the second quarter of 2012. At its peak, in the second and third quarters of 2008, there were 52 listings.

The value of shares traded in 2013 was BD225.87m ($598.56m), up from BD110.24m ($292.14m) in 2012, a 104.9% increase. In the first three quarters of 2014, the value of traded shares reached BD235.77m ($624.79m), topping the 2013 total. The volume of shares traded in 2013 reached 1.87bn, up from 627.71m the previous year, an increase of 197.6%. By the end of September 2014 some 1.01bn shares had been traded. In 2013 Bahraini investors accounted for 67.2% of trades by value, with non-Bahrainis accounting for the remaining 32.8%. This shifted slightly to favour foreign investors by the third quarter of 2014, with the breakdown at 59.78% and 40.22%, respectively. In the third quarter of 2014 there were 47 companies listed, 22 mutual funds, 9 bonds and sukuks, and one preferred share. Of the companies listed, 16 advanced, 13 declined and 18 were unchanged. Trading in four companies and the Ahli United Bank Class A Preference share was suspended as of the end of October 2014.

Shares By Sector

The Bahrain All-Share Index lists shares under six sectoral indices: commercial banks, investment, insurance, services, industrial, and hotels and tourism. All but two of these sectors showed an improvement in 2013, according to the bourse’s annual trading bulletin. Commercial banks were up 664.24 points, or 37.1%, ending the year on 2456.44; investment was up 0.69%, or 4.49 points, to 650.69; insurance rose 9.2%, or 158.3 points, to 1876.33; and industrial was up 146.21 points, or 21%, to 842.47 points at the end of 2013. The services segment of the market dipped by 2.9% and 35.98 points to 1206.77, while hotels and tourism fell by 5.45%, or 188.93 points, to 3279.94. In the third quarter of 2014, only the industrial sector was in decline, having lost just 1.51%, with all other indices showing expansion from the same quarter of 2013.

The dominant role played by commercial banks, along with the wholesale banks listed under the investment category – which together comprised 44.3% of the exchange’s market capitalisation at the end of 2013 – partially explains the overall performance of the bourse in the last 10 years, as the value of shares mirrored the trajectory of the run-up to the financial crash and its aftermath. In 2013 the value of trades in commercial bank shares was BD153.62m ($407.1m), or 68% by value and 70.6% by volume of the bourse. This dominance continued in the first nine months of 2014, with commercial banks comprising 69.16% of the value of all shares traded and 74.48% of the volume in the first quarter, 77.62% of the value and 78.64% of the volume in the second quarter, and 66.96% and 74.36%, respectively, in the third quarter of the year. In terms of market capitalisation the commercial banking sector grew by 39.8% from BD2.33bn ($6.17bn) in 2012 to BD3.25bn ($8.61bn) in 2013 and as a result was worth 46.7% of the total market capitalisation of the Bahrain Bourse, which was BD6.96bn ($18.44bn) at the end of 2013. The investment sector was worth BD1.69bn ($4.48bn), or 24.3% of the total 2013 market capitalisation of the exchange. As of the third quarter of 2014 banking made up 47.57% of the market capitalisation of the bourse at BD4.03bn ($10.68bn) and investment was worth BD2.2bn ($5.83bn), or 25.95% of the total.

Five Popular Shares

Shares in four retail lenders and one wholesale bank dominated the bourse in terms of both volume and value in 2013. Conventional retail lender Ahli United Bank; Islamic retail banks Bahrain Islamic Bank (BisB), Al Salam and Ithmaar Bank; and Islamic wholesale bank Gulf Finance House made the greatest impact. In terms of value, Ahli United Bank accounted for 24.2% and BD54.56m ($144.58m), BisB for 15.6% and BD35.28m ($93.49m), Al Salam for 10.3% and BD23.24m ($61.59m), Ithmaar Bank for BD21.71 ($57.53m) and 9.6%, and Gulf Finance House for 7.6% and BD17.14m ($45.42m). By value the five listed companies were worth 67.3% of the total market collectively, but by volume the same five firms made up 80.6% of activity. BisB alone accounted for 488.27m shares or 26.1% of the market total, followed by Gulf Finance House with 288.20m or 15.4%, Ithmaar Bank (251.33m, 13.5%), Al Salam (250.42m, 13.4%) and Ahli United Bank (227.29m, 12.2%).

These figures reflect a wave of mergers and consolidation across the banking sector, with conventional lenders looking for inroads into the rapidly growing Islamic finance market and all banks conscious of the need to gain strength to meet the demands of tighter regulation and to withstand any future shocks to the financial system.

In March 2013, 51% of shares in BisB were bought by a state pension fund and the conventional retailer National Bank of Bahrain. Al Salam merged with the conventional lender BMI Bank, while Gulf Finance House had hoped to sell its 47% stake in Islamic retail outfit Khaleeji Commercial Bank to Bank Alkhair. In April 2014 rumours that the conventional retail Ahli United Bank might be in merger talks lifted the bourse index by 0.7% in a day’s trading even though the Reuters exclusive gave no details regarding the lender’s potential new partner.

In the third quarter of 2014 the mix of companies in the top five was slightly more diverse, with Aluminium Bahrain (Alba) and Bahrain Telecommunications (Batelco) joining Ahli United Bank, Ithmaar Bank and Al Salam to make up 76.87% of the market’s value. These three banks also featured in the top five as measured by trading volume, a group which also included Khaleeji Commercial Bank and the Bahrain Tourism Company, collectively accounting for 77.83% of the volume of trades.

The Big Five

Ahli United Bank also tops the rankings when it comes to market capitalisation of shares on the Bahrain Bourse. Its value in the third quarter of 2014 was BD1.84bn ($4.88bn), or 21.78% of the total market capitalisation of the exchange. Conventional retail lender National Bank of Bahrain had a market capitalisation of BD832.7m ($2.21bn), equivalent to 9.83% of the total, Arab Banking Corporation’s market cap was BD820.73m ($2.17bn) or 9.69%, Alba was worth BD759.7m ($2.01bn) or 8.97% and the telephone company Batelco was worth BD582.1m ($1.54bn) or 6.87%. Together, these five firms had a market capitalisation of BD4.84bn ($12.83bn) or 57.15% of the total.

Major Sharehoders

Institutional investors acting on behalf of Bahraini government bodies are the major shareholders on the bourse, but investors from a handful of other countries also own a significant proportion of stocks. Companies on the exchange are required to name any person, or entity with a 5% stake or higher, and based on declarations by individual companies, it is possible to gain a reasonably clear picture of share ownership in Bahrain. The biggest individual shareholder on the exchange is the sovereign wealth fund Mumtalakat, which holds the state’s interest in non-oil-related companies. It owns nearly 13.1% of all shares, worth BD1.02bn ($2.7bn) based on the March 2014 market capitalisation for the entire bourse of BD7.76bn ($20.56bn). Mumtalakat’s portfolio is limited to four equities: Alba, Bahrain Flour Mills, Batelco and the National Bank of Bahrain. Bahrain’s state pension funds have shares worth BD596.68m ($1.58bn), or 7.9% of the total. Businesses, institutions and individuals from Kuwait constitute the second-largest group of investors on the exchange after Mumtalakat with BD878.79m ($2.33bn) worth of shares, or 12% of the total. Entities domiciled in Libya, Saudi Arabia, the Cayman Islands and the UAE are the other significant overseas investors. Libyan institutions own shares worth BD416.09m ($1.1bn), or 5.5% of the total, Saudi investors hold 5% worth BD384.69m ($1.02bn), while funds based in the Cayman Islands own shares worth BD204.03m ($540.68m), or 2.7% of the total market capitalisation of the bourse. UAE investors have shares worth BD53.84m ($142.68m), or 0.7% of the total. Although there are investors from other countries such as Iraq, Oman and the UK, investors from Kuwait, Libya, Saudi Arabia, the Cayman Islands and the UAE own 25.9% of all shares on the exchange between them.

Four Bahraini business families also have significant portfolios of shares on the exchange. Abdul Hameed Zainal Mohamed Zainal has shares worth BD6.26m ($16.59m), Yusif Abdulla Amin has a BD16.69m ($44.23m) portfolio of shares and Yusif Khalil Almoayedd owns shares totalling BD20.22m ($53.58m). Seven members of the Nass family own 61% of Nass Corporation, which means their collective shareholding was worth BD23.08m ($61.16m) in March 2014. A further BD191m ($596.15m) shares on the Bahrain Bourse are owned by other companies that are also listed there, representing 2.5% of the total value of shares on the exchange.

IPO Activity

The last initial public offering (IPO) launched on the Bahrain Bourse was in November 2010 for 10% of the shares in aluminium producer Aluminium Bahrain (Alba), which is owned by Mumtalakat (roughly 70%) and Saudi Arabia’s SABIC (around 20%). Mumtalakat sold 142m ordinary shares at BD0.90 ($2.39), which was at the bottom of the BD0.90-1.25 ($2.39-3.31) range, and the issue raised BD1.26m ($338m). According to Alba’s 2013 annual report it now has 2387 shareholders with a stake of less than 1% in the company and in 2014 it paid a dividend of 36 fils ($0.10) per share.

However, shareowners that invested in the company at the IPO have seen the value of their shares decline dramatically since then. The price remained above BD0.90 ($2.39) until August 1, 2011, when it tumbled. By October 2011, it was valued at BD0.48 ($1.27) and on December 25, 2012 the shares reached their nadir at BD0.40 ($1.07). The price did climb again, but was last above BD0.60 ($1.59) on Feb 27, 2012. In early November 2014 it was trading at BD0.51 ($1.35). The key underlying factor in the company’s fortunes is not related to those managing the IPO or market conditions on the exchange, but to a government decision in 2012 to increase the price at which it sells natural gas to Alba. Gas is an important feedstock for the company’s smelters and so comprises a major production cost.

New Listing

After nearly four years, a new IPO was launched on the bourse on September 2, 2014 by the Kuwaiti company Zain. When it was awarded Bahrain’s second mobile licence in 2003, ending Batelco’s monopoly, a clause in Zain’s contract stipulated that the company had to float 15% of its shares within a decade. An original IPO was abandoned in 2008, but in its 2013 annual report, Zain Group declared an IPO would take place in 2014. Having originally scheduled the subscription period to last two weeks, the firm extended the offering until September 30. The delay was not down to company’s underlying commercial fundamentals, but a result of the current division of equity.

In 2013 Zain Bahrain’s mobile operator licence was extended for a further 15 years to 2028 and it demonstrated its commitment to a long-term future in the kingdom by increasing capital expenditure by 42% compared to 2012. Zain introduced its 4G long-term evolution service in 2013 and reported a 20% annual increase in data revenues and 25% growth in its customer operator base. It has 772,000 customers in the kingdom, 72% of them on prepaid contracts, and reported net income of $14m. Zain Group owns 56.25% of the equity in Zain Bahrain and so risks losing overall control with an IPO representing 15% of the company’s shares. According to Zawya, other major shareholders are Zain Bahrain’s chairman, Sheikh Ahmed bin Ali Abdulla Al Khalifa, with a 16.3% stake, and Vodafone, which owns 6.1%.

Road To IPO

In April 2014 Sheikh Fawaz bin Mohammed Al Khalifa, then the minister of state for communications affairs, met Zain Bahrain’s general manager, Mohammed Zainalabedin, to discuss developments regarding the IPO. The company noted it had officially filed a request for conversion from a closed joint-stock company to a public joint-stock company and that its request had been published in the official gazette on February 13, with a 60-day period for any objections to be raised ending on April 12. According to reports from the Bahrain Association of Banks, Sheikh Fawaz welcomed the move, saying it would help to generate economic growth for the telecommunications sector.

Zain Bahrain also revealed it had appointed BBK as the lead receiving bank, while Gulf International Bank and National Bank of Kuwait Capital had been appointed IPO joint lead managers. Subsequently, in early May 2014, Zain Group announced it had upped its stake in Zain Bahrain by paying $12.5m for a further 6.25% to take its total holding to 62.5%, enabling it to retain majority control after the listing. Zain did not reveal the shareholders from which it had purchased the additional stake.

After the listing ended on September 30, the firm had raised BD9.1m ($24.1m) at BD0.19 ($0.50) per share. However, retail and institutional investors only bought 16.7m shares, 34.8% of the offering, according to Zain Bahrain. The remaining 31.3m shares were acquired by the underwriters, Gulf International Bank’s investment banking arm.

In early 2014 the bourse hinted another IPO was in the works by a company running petrol stations in the country. Bahrain Petroleum Company, the government-owned oil producer and refiner, does own a number of petrol stations, but so do other companies. At the time of press no further details were available about this potential listing.

Bonds & Sukuks

Treasury bills (T-bills), government development bonds and three types of sukuks are issued via the CBB and sold by auction or tender. T-bills with a term of 91 days are sold on a weekly basis with a value of BD45m ($119.25m), 182-day T-bills are issued monthly with a value of BD30m and 364-day T-bills with an issue amount of BD150m ($397.5m) are issued quarterly. These are sold in a variable-rate auction with domestic retail banks, the Social Insurance Organisation pension fund and other central banks as eligible bidders. The value of Tbills outstanding as of April 2014 was BD1.18bn ($3.13bn), according to the CBB. Government development bonds are long-term securities issued on an ad-hoc basis in either US dollars or Bahraini dinars.

The three sukuk issues are: the Al Salam sukuk, which is issued monthly with a value of BD36m ($95.4m) and a 91-day maturity; the short-term ijara (leasing) sukuk, with a value of BD20m ($53m) and a maturity of 182 days; and the long-term ijara sukuk, which are issued on an ad-hoc basis with a maturity of between three and 10 years.

While T-bills and both types of short-term sukuks were oversubscribed in April 2014, there were no scheduled issuances of the long-term ijara sukuk in the calendar for 2014. However, the government did issue a dollar-denominated, 30-year, $1.25bn bond at 6% in September, which was oversubscribed.

Regulation

Capital markets are regulated by Volume Six of the CBB Rulebook and participants are notified of amendments and updates on a quarterly basis. The most sweeping recent amendment was a new section, the Offering of Securities Module, which came into effect in January 2014. It was described by the CBB’s executive director of financial institution supervision, Abdul Rahman Al Baker, as “the most import module of the Capital Markets Rulebook”. It spells out the roles and responsibilities of all those involved in the issuing, offering, floating and subscribing to different types of securities, whether conventional or sharia compliant. The new module aimed to make listing cheaper and quicker while maintaining strict standards of regulatory supervision and it also allowed all GCC issuers to submit applications to the CBB prepared in accordance with the GCC’s Unified Standards, to help facilitate greater integration among Gulf markets.

The CBB has issued 28 capital markets licences, including two exchanges, the Bahrain Bourse and the Bahrain Financial Exchange; one clearing, settlement and central depository system, the BFX Clearing and Depository Corporation; and one securities dealer, Grrans Commodities, as well as brokers and dealers. Licences have been granted to 52 investment businesses arranged under three categories. Category-1 licence holders are asset managers that can manage client money and a proprietary trading account of their own, Category-2 forbids a proprietary trading account and Category-3 covers those providing advisory services only. As of April 2014 there were 21 Category-1 licensees, with two in liquidation; 13 Category-2 licensees, with two in liquidation; and 18 Category-3 licensees.

Outlook

The first IPO on Bahrain Bourse in four years looks unlikely to trigger a round of new listings. The share offering was largely motivated by contractual obligation and the response from investors was lukewarm. However, the exchange is looking for new ways to stimulate activity. At its silver jubilee celebration in September 2014, Khalifa bin Ebrahim Al Khalifa, the CEO of Bahrain Bourse, looked ahead to the formation of the Bahrain Investment Market, a trading platform to host a broad range of companies in the kingdom, and announced the legal structure for the new entity had been completed. At the same event, it was announced that a new real estate investment trust will be launched as a trading depository in November 2015, marking the integral role real estate plays in the economy.