19/05/2016 17:07 AST
Capital Intelligence Ratings (CI Ratings) has affirmed the National Bank of Bahrain’s (NBB) Long- and Short-Term Foreign Currency Ratings (FCRs) at ‘BBB-’ and ‘A3’, respectively. These ratings are constrained by CI Ratings’ Sovereign Ratings for the Kingdom of Bahrain (‘BBB-’/’A3’). The Financial Strength Rating (FSR) of ‘A-’ is also maintained on the basis of the bank’s solid capital adequacy ratio (CAR), high liquidity and strong customer deposit funding, established business franchise and good profitability metrics. The FSR is constrained by downside risks to Bahrain’s growth potential as a result of a sharp decline in the oil price, and the resultant increased credit risk in the face of a challenging operating environment.
Other factors constraining the FSR are relatively high concentration risks in the credit portfolio, customer deposits and investment securities, as well as the still low loan-loss reserves (LLRs) cover and relatively high non-performing loan (NPL) ratio. In view of the recent ‘Negative’ Outlook CI Ratings assigned to the Kingdom of Bahrain’s Sovereign Ratings in March 2016, a ‘Negative’ Outlook is also appended to NBB’s Ratings. The Support Level of ‘1’ is affirmed, in view of the bank’s significant government ownership and systemic importance.
NBB is the Kingdom of Bahrain’s flagship bank and commands an important position in the domestic banking sector. Despite very keen competition in the marketplace, the bank’s substantial indirect government ownership bestows significant benefits to its business franchise. Management is experienced and follows a conservative credit policy. Although Bahrain’s economy is relatively more diversified than other GCC countries, there are downside risks to economic growth potential because of the sharp fall in the oil price. This, in turn, has elevated credit risk particularly in the trade and real estate sectors. Notwithstanding NBB’s moderately weak loan asset quality metrics, the sound coverage in respect of capital, coupled with the still low share of loans in total assets, is a key risk mitigating factor. NBB’s effective coverage (i.e. LLRs plus free capital) exceeded NPLs by an adequate margin.
However, the increasing credit risk in the economy may translate into a higher NPL accretion rate going forward. In this regard, the bank’s risk absorption capacity remains good.
Liquidity continues to be strong reflecting an ongoing cautious lending policy. Although loan growth resumed vigorously in 2015, this followed successive contractions in preceding years. The bulk of liquidity however continued to be deployed into Bahrain treasury bills and government bonds, which, in turn, give rise to high concentration risk. NBB’s exposure to government securities represented a high multiple of total capital. A repo facility for all government securities is available at the Central Bank of Bahrain (CBB), while $ sovereign bond issues are also traded regularly in the secondary market. Liquidity ratios remained among the best in Bahrain and the GCC region, and premised on a strong customer deposit base. The proportion of government related deposits is limited. NBB is well placed to head off the expected increase in competition for customer deposits in the banking sector given its strong liquidity.
The bank’s CAR, calculated to Basel III standards, was solid and among the highest in the local market. The capital base has a very high Tier 1 component which provides an effective risk buffer. A major factor contributing to the high CAR is the considerable proportion of assets invested in zero risk-weighted government securities, and conversely the low share of loans in total assets. NBB’s profitability metrics remained strong at both the operating and net levels, aided by diversified sources of net interest and non-interest income, especially fees and commission. Ongoing tight cost control has contributed to the bottom line.
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