* Arab Spring fallout makes refinancing challenges harder
* Real estate slump pressures banks' asset quality
* Links to Saudi banks to grow in importance
By David French
DUBAI, Feb 2 Bahraini financial firms face
a tough task raising funding in 2012 as political tensions from
last year's Arab Spring unrest fester and real estate
investments show no sign of paying off.
Analysts say one option for banks in the tiny island kingdom
is to look to neighbour Saudi Arabia, but getting a hearing is
often a challenge because lenders there have enough local
business on their hands.
The violent protests against Bahrain's rulers rattled
Western banks operating there and equally importantly dealt a
body blow to real estate prices, leading to impairments at
Islamic banks in particular.
"Bahrain is a ghost town right now," said one Dubai-based
banker who makes frequent trips to the island, speaking on
condition on anonymity.
"All these big offices have been built but there are only 20
or 30 people in them. When you go and have a meeting there, you
don't see a soul."
A report by Moody's in October stated 29 percent of loans
extended by Bahraini retail banks in the kingdom were real
This is particularly the case for Islamic banks, who like
the sector because of its sharia-compliance. Concern about their
capital bases has already seen the central bank advocate the
merging of five Islamic banks, which should be completed during
the first quarter.
"Conventional banks have relatively less real estate
exposure, especially compared to before the financial crisis,
but Islamic banks have been affected and if you follow their
results, there have been impairments on assets," said Waruna
Kumarage, senior analyst for asset management at SICO Bahrain.
The value of assets in the Bahrain banking system fell to
$202.2 billion at the end of October from $222.2 billion at the
end of 2010, according to a report published early this year by
the Union of Arab Banks.
Consultancy Ventures Middle East said the value of contracts
awarded in the Bahrain building construction industry fell to
$788 million in 2011 from $972 million in 2010, with estimates
for 2012 seeing a moderate rebound to $949 million.
While there is little formal data on the sector, according
to Kumarage, anecdotal evidence suggests issues such as
oversupply were present before the unrest early last year.
"Whatever impact there has been on prices has come from the
financial crisis and the oversupply since then. The ingredients
were in place before that (the unrest)," Kumarage said.
Against such a backdrop, Bahraini banks with large
maturities to meet in 2012 may have to consider many options.
Among major maturities are Arab Banking Corp, which is
due to repay a $1 billion loan in June, and Ahli United Bank's
$618 million facility maturing in April.
One potentially difficult refinancing in Bahrain this year
is the $1.1 billion sharia-compliant loan which Arcapita has to
meet in April.
"I'm not sure where they are going to get the money from,"
the Dubai-based banker said. "They have mostly local real estate
assets and it is international lenders who have lent to them."
The investment firm was in the process of selling assets to
raise the necessary capital and was negotiating with banks about
the upcoming repayment, its chief executive told Reuters in
June. Arcapita declined to comment when contacted for this
Refinancing maturities may be difficult for a number of
reasons. European banks, which made up a large chunk of the Gulf
loan market in past years, have been retreating from the region
and any bank which is still lending will be aware of the higher
risk-weighting that any deal in Bahrain will require.
The debt capital markets could provide a route for the best
credits in the kingdom, but the nervousness which remains among
the international investor community -- Bahrain paid 450 basis
points over midswaps when it issued a seven-year sukuk (Islamic
bond) in November -- means they will have to pay a premium for
"If I was doing a roadshow now, I would emphasise that we're
separate from the Bahrain story," a source at a Bahraini bank
said, speaking on condition of anonymity.
Like the political establishment, banks could also turn for
assistance to Saudi Arabia, separated from the island by only a
16 mile (26 km)-long causeway.
Gulf International Bank, based in Bahrain but
97.2 percent owned by Saudi Arabia's Public Investment Fund,
privately placed a $300 million bond in December, which bankers
said was mostly sold into the Saudi market.
"It is feeling more like a province of Saudi Arabia," the
Bahrain-based banker said.
"I have gone across the causeway with my begging bowl to
raise finance and I have been quite successful in doing that."
However, extracting loans from Saudi banks is not easy, the
"In terms of commercial reality, we are not getting the same
attention from Saudi banks as Bahrain gets in political and
military channels, as there is so much business in Saudi that
(the banks) don't need to go outside," the source said.
Therefore, like other banks in the region, those in Bahrain
will rely on other banks with which they have longstanding
business relationships to provide funds necessary to meet
Institutions which stick with their Bahraini clients now may
be rewarded both with higher pricing because of the risk
premium, and future business when political tensions eventualy
"We took a large position in it and while we got the phone
call from the central bank, we would have invested without it,"
the Bahrain banker said of the kingdom's November sukuk issue,
pointing out that 450 bps for a credit regarded as safe was a