National Bank of Bahrain’s Ratings Affirmed

(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 or the Bank) 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 Negative, in line with the Outlook assigned to Bahrain’s sovereign rating (‘B+’/‘B’/Negative). The Bank’s Core Financial Strength (CFS) rating is affirmed at ‘bbb-’.

The Bank’s BSR is derived from a CFS rating of ‘bbb-’ and the constraints imposed by Bahrain’s Operating Environment Risk Anchor (OPERA) of ‘b+’, indicative of high risk. Our 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 status as the sole majority government-owned bank in the country, its financial capacity may be limited, as indicated by Bahrain’s sovereign rating. NBB’s FCRs and outlook remain closely correlated with Bahrain’s sovereign ratings given its majority government ownership as well as D-SIB status. Hence, any deterioration (or improvement) in Bahrain’s ratings would have a corresponding effect on NBB’s ratings.

The CFS is underpinned by NBB’s well-established business franchises (conventional and Islamic banking – the latter through Bahrain Islamic Bank (BIsB)), majority and supportive government ownership, strong liquidity and customer deposit funding, and sound profitability at all levels. Also supporting the CFS is the sound CAR and CET 1 ratio, capital flexibility stemming from majority government ownership, prudent leverage, and good management. The major factors constraining the CFS are the challenging operating and geopolitical environment including high economic risk factors and keen competition, significant concentration in Bahrain government securities, and a concentrated borrower and customer deposit base (mostly related to the government and GREs).

NBB is a well-managed and inherently conservative institution. The business model focused on retail and corporate banking is sound, and has demonstrated resilience throughout economic cycles. Given its long history as Bahrain’s sole majority government-owned bank (D-SIB), NBB’s flagship status is an important non-financial credit strength. Its Islamic subsidiary Bahrain Islamic Bank (BIsB) is also the oldest Islamic bank in Bahrain and provides a significant degree of risk diversification away from NBB’s well-established conventional banking business. BIsB contributes 28% to the consolidated balance sheet and operates under its own brand name as a distinct entity managed and controlled by NBB. BIsB is self-funded, thereby sharply reducing any likelihood of needing parental financial support.

The Bank’s longstanding association with the government underpins the strong degree of depositor confidence in the institution. This factor, alongside an extensive branch network, supports the Bank’s good deposit-gathering capability, including the sound liquidity and funding profile. The bulk of NBB’s funding is derived from low-cost sticky retail CASA. However, in common with most other banks in the Gulf region, NBB exhibits a significant degree of customer concentration due to sizeable deposits that it receives from government and quasi-government entities. Despite the relative stability of these funds over time, the concentration risk is considered a credit vulnerability given the attendant funding and liquidity risk. This risk factor is partially mitigated by NBB’s large stock of liquid assets (particularly government securities).

The Bank’s liquidity position has been consistently good, underpinned by a strong customer deposit base. Liquidity metrics compare favourably with many banks in Bahrain and the GCC region. This is a credit strength. Both the liquidity coverage ratio and net stable funding ratio are at good levels, and we expect this to remain the case in the intermediate term. The bulk of liquidity remains deployed in Bahrain government securities, which facilitate funding through the Central Bank of Bahrain repo market as and when necessary. However, NBB’s high exposure to government securities translates into a significant degree of concentration risk equivalent to a multiple of total equity. A majority of securities are held at amortised cost, while the interest rate risk associated with the fixed rate bond portfolio is largely hedged. Over one-half of sovereign bonds were floating rate.

Loan asset quality improved moderately in 2024 (and into Q1 25). NPLs (stage 3) declined as a result of a combination of recoveries, write-offs and credit upgrades. In turn, the NPL to gross loans ratio decreased to 4.5%. Similarly, stage 2 loans declined further to a low 3.3% of gross loans, indicative of reduced stress in the credit portfolio and the likelihood that future NPL formation is likely to be manageable. Recent lower oil prices, however, could lead to tighter liquidity conditions in the local market and exert cashflow pressures on borrowers. That said, the Bank has demonstrated an ability to proactively manage past due credits and restrict their migration to stage 3 during periods of heightened credit risk. Loan-loss reserve (LLR) coverage was satisfactory. Meanwhile, the proportion of NPLs not covered by LLRs reduced further and equated to a negligible share of total equity in 2024. The high borrower concentration risk is partially mitigated by the fact that more than one-half of the top 20 exposures relates to government entities.

Capital is of good quality given the high loss-absorbing CET 1 component. Capital ratios remained sound despite some further slippage seen in 2024. The good headline capital ratios and leverage are credit strengths. CI notes that the high CAR is in part a function of the zero risk-weighting of Bahrain government securities and, therefore, a relatively low risk-weighted asset density. The significant exposure to government paper renders capital potentially vulnerable to unforeseen losses given the Bahrain sovereign’s high credit risk profile. 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 be limited given its own fiscal constraints. Notwithstanding a generous dividend policy, the internal capital generation rate has remained in positive territory, but volatile.

An important factor supporting the ratings is the Bank’s good profitability at both the operating and net level despite some degree of volatility. Although the consolidation of BIsB – which has moderate earnings strength − has the effect of depressing NBB’s overall profitability, the consolidated ROAA remains good. This reflects sound operating income generation coupled with satisfactory cost efficiency. Notwithstanding the increased contribution from volatile securities trading income in recent years, both earnings quality and stability are considered sound. This reflects reasonably diversified sources of net interest income and, to a lesser extent, non-interest income. Although the recent lower interest rate environment in Bahrain has pressured NIM, the Bank has partially counterbalanced this by growing the credit portfolio in money terms. CI anticipates NBB to sustain profitability at broadly the current level in the short term.

The OPERA 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 size 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 5.0 times GDP including the offshore banks, with the local banks about 2.5 times GDP in 2024). 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 demonstrated financial support from other GCC states (in particular Saudi Arabia).

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 risk profile as measured by key metrics will more than likely be maintained at the current level.

Rating Dynamics: Upside Scenario

The most likely upside scenario for the next 12 months would be a revision of the Outlook to Stable. This would need to be preceded by a similar rating action on the sovereign, all other factors remaining unchanged.

Rating Dynamics: Downside Scenario

While not our base case, the Bank’s LT FCR and BSR could be lowered by more than one notch if this was preceded by a similar rating action taken on the sovereign’s ratings. The BSR could also be lowered in case overall financial metrics deteriorated.

Contact

Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: ...
Secondary Analyst and Committee Chairperson: Rory Keelan, Senior Credit Analyst

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