(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of National Bank of Bahrain B.S.C. (NBB) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed NBB’s Bank Standalone Rating (BSR) at ‘b+’. The Outlook for the LT FCR and BSR remains Stable, in line with the Outlook assigned to Bahrain’s sovereign ratings.
The Bank’s BSR is derived from a Core Financial Strength (CFS) rating of ‘bbb-’ and the constraints imposed by the Operating Environment Risk Anchor (OPERA) of ‘b+’. CI’s Extraordinary Support Level (ESL) assessment of Moderate does not result in any uplift for the Bank’s LT FCR because the BSR is already at the sovereign level. Although we deem the government’s willingness to provide support to be high given NBB’s systemic importance and majority state ownership, its financial capacity may be limited, as indicated by Bahrain’s sovereign LT FCR (‘B+’ with a Stable Outlook). NBB’s FCRs and Outlook remain closely correlated with Bahrain’s sovereign ratings given the majority government ownership.
The CFS is underpinned by NBB’s well-established and diversified business franchise (following Bahrain Islamic Bank [BIsB] acquisition in 2020) including majority government ownership, strong liquidity and customer deposit funding, and sound profitability at all levels. Also supporting the CFS is the high CAR and CET 1 ratio, as well as prudent leverage. The major factors constraining the CFS are a challenging operating environment including high economic risk factors despite high oil prices, concentration in Bahrain government securities, and high customer concentrations in loans and deposits.
The OPERA is at a level indicative of high risk and is driven by Bahrain’s large government debt, significant external financing needs and limited fiscal flexibility. Other risk factors are Bahrain’s relative dependence on hydrocarbon revenues, the small nature of the economy, as well as geopolitical and institutional vulnerabilities. Industry risk is also deemed high in view of the large size of the banking sector (exceeding 5 times GDP). Bahrain currently has limited capacity to absorb economic and financial sector shocks, although the risks associated with high gross public financing needs are partially mitigated by financial support from other GCC states (notably the Kingdom of Saudi Arabia).
Notwithstanding the elevated credit risk in Bahrain’s economy, CI considers the Bank’s business model able to withstand economic cycles given its focus on conventional and Shari’a compliant retail and corporate banking. As the Kingdom of Bahrain’s flagship bank, NBB’s majority government ownership, sound business franchise and market share are considered important credit strengths. The strategic acquisition in January 2020 of a majority stake in associate BIsB − which will continue to operate under its own brand name as a distinct entity managed and controlled by NBB − serves to diversify the Bank’s risk assets and revenue streams away from conventional banking. BIsB has a well-established franchise and benefits from strong brand recognition as the oldest Shari’a compliant bank in Bahrain. Being less than half the size of NBB however, BIsB’s risk metrics are not as strong as NBB.
NBB’s longstanding association with the government underpins the strong degree of depositor confidence in the institution despite Bahrain’s high credit risk profile. This, in turn, supports the Bank’s deposit gathering capability, including the sound funding and liquidity profile. Similarly, BIsB’s current strong parentage has enhanced its own deposit-mobilising capability. The bulk of NBB’s funding is derived from a large and growing share of low-cost ‘sticky’ retail CASA. Retail deposits grew noticeably after the acquisition reflecting the dominance of retail depositors at BIsB. Nonetheless, in common with most other banks in the Gulf region, NBB exhibits a high degree of customer concentration, reflecting the sizeable deposits it receives from government and quasi-government entities.
While these deposits elevate funding and liquidity risk to some degree, this risk factor is partially mitigated by NBB’s large stock of liquid assets, as well as the historically stable nature of the deposits. Liquidity remains deployed mostly in high-yielding Bahrain government securities, which facilitate funding through the Central Bank of Bahrain (CBB) repo market when necessary. Despite some tightening in 2021, the Bank’s liquidity has consistently been sound and compares favourably with many banks in Bahrain and the GCC region. Both the LCR and NSFR are at good levels.
Profitability has been consistently sound at all levels, reflecting good operating income generation coupled with sound cost efficiency. Both earnings quality and stability are considered rather strong. Operating income is firmly underpinned by reasonably diversified sources of net interest income (NII) and, to a lesser extent, non-interest income (non-II); the latter however includes some non-recurring items. Although operating and net profitability declined in recent years, this was partially due to BIsB acquisition − whose earnings profile is not as good as NBB − and the effects of Covid-19.
More positively, in Q1 22 profitability at both the operating and net levels improved noticeably lifted by higher NII and non-II, alongside a lower provision charge. Management project the improved performance seen to continue throughout 2022, having fully addressed credit-related issues at BIsB. In turn, NBB’s risk absorption capacity is expected to continue to strengthen. The wider NIM seen in Q1 22 amid a higher interest rate environment in Bahrain, will further support NII generation as lending resumes. Moreover, further cost and revenue synergies are expected in the near future.
NBB’s total CAR and balance sheet leverage remained sound and broadly stable in 2021. Although total CAR and CET 1 ratio remained well below the levels seen prior to BIsB’s acquisition, these metrics continue to support the Bank’s ratings. The high headline CAR of 22.1% is partially a function of the zero risk-weight applied to Bahrain government securities, in accordance with CBB regulations. NBB’s significant exposure to sovereign paper may render capital vulnerable to unforeseen losses in a sovereign distress scenario. Nonetheless capital quality is good. We consider capital flexibility to be rather strong given NBB’s status as the sole majority government-owned bank in Bahrain. That said, the government’s capacity to inject fresh cash is likely to have diminished given its weaker fiscal space. BIsB’s total CAR improved to 19.1% due to BHD25mn (Basel III compliant) subordinated mudaraba (AT1) Sukuk issue.
In terms of rating constraints, the Bank has significant concentration of assets in Bahrain government securities. Exposure was equivalent to a high multiple (2.5x) of NBB’s regulatory capital. The market risk associated with the fixed rate bond portfolio is largely hedged.
In view of the improvements seen in 2021, NBB’s loan asset quality is no longer considered a credit challenge as was the case a year earlier. The improving trend seen in loan asset quality metrics continued into Q1 22. Additional write-offs in 2021 produced a decline in NPLs in both money and percentage terms (the rise seen a year earlier was largely due to BIsB consolidation). Although stage 2 loans grew significantly, they formed a still low 6.3% of gross loans. CI notes however that ongoing forbearance measures will have masked to some degree underlying trends in the credit portfolio. Indeed, the impact of these measures will only become apparent after CBB’s payment deferral programme ends at end-June 2022. However, any new NPLs are likely to be partially counterbalanced by settlement of existing problem loans. The quality of BIsB’s financing portfolio was broadly stable, having significantly improved in the prior year due to write-offs after NBB acquired majority control.
Concurrently, NBB’s loan-loss reserve (LLR) cover for NPLs improved further to a satisfactory level (due to a decline in NPLs). This, in turn, has strengthened NBB’s capacity to absorb credit losses. The extended NPL coverage ratio rebounded to a sound 593% in 2021. LLR coverage at BIsB was just adequate.
Rating Outlook
The Outlook for both the LT FCR and BSR is Stable, indicating that the ratings are unlikely to change over the next 12 months. This reflects our view that NBB’s credit risk profile as measured by key metrics will more than likely be maintained at the current level, notwithstanding Bahrain’s potential economic headwinds and regional geopolitical tensions.
Rating Dynamics: Upside Scenario
We do not expect a change in NBB’s ratings unless our assessment of Bahrain’s sovereign credit risk and/or OPERA improves. This is currently seen as being unlikely within a 12-month timeframe.
Rating Dynamics: Downside Scenario
While not our current expectation, the Bank’s ratings could be reduced by one notch over the next 12 months in the event Bahrain’s sovereign ratings are downgraded. The ratings could also be lowered if NBB’s key credit metrics deteriorated significantly.
Contact
Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: morris.helal@ciratings.com
Secondary Analyst and Committee Chairperson: Rory Keelan, Senior Credit Analyst
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