November 2, 2017 / 2:19 PM / a year ago

Fitch Affirms Bahrain's BBK B.S.C at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) LONDON, November 02 (Fitch) Fitch Ratings has affirmed BBK B.S.C's (BBK) Long-Term Issuer Default Ratings (IDR) at 'BB+' with Negative Outlook, Viability Rating (VR) at 'bb+' and Support Rating (SR) at '3'. A full list of rating actions is at the end of this rating action commentary. The Negative Outlook mirrors that on the Bahraini sovereign (BB+). KEY RATING DRIVERS IDRS, SR AND Support Rating Floor BBK's IDR is driven by the standalone strength of the bank as reflected by its VR. The IDR is also underpinned by potential sovereign support as reflected by the bank's Support Rating Floor (SRF) of 'BB+'. BBK's SR and SRF reflect Fitch's expectation of a moderate probability of support from the Bahraini authorities, if required. Our view of support is based on the systemic importance of BBK as a major retail bank in Bahrain, and the Bahraini authorities' high propensity to support domestic commercial banks, albeit with a weakening ability to do so. The Bahraini government holds a 32.1% stake in BBK through its social insurance organisation, a longstanding shareholder in the bank. VR BBK's VR is capped by the operating environment in Bahrain, and more specifically by the Bahrain sovereign rating. BBK is predominantly a domestic bank with significant exposure to the sovereign and the domestic operating environment. The VR factors in the bank's reliance on a small and competitive domestic environment and concentrations in both loans and deposits, which although comparing well with GCC peers', still give rise to event risk. BBK's VR takes into consideration the bank's satisfactory financial performance despite the weakening operating environment in Bahrain. BBK has maintained solid margins and consistent profitability through its well-established franchise. Operating return on assets and return on equity have been fairly consistent for the past three years at about 1.5% and 15% respectively. Its net interest income (NIM) improved to 2.7% in 2016 (2.3% in 2015) as the bank repriced its loan book and customer deposits dropped slightly due to the non-renewal of some government and government related entities (GREs) deposits due to tightening liquidity. The bank has a solid domestic franchise with a well-entrenched retail and corporate banking franchise in Bahrain, but limited competitive advantage compared more geographically diversified peers. The bank has an adequate management team that is highly experienced in local banking. BBK's strategic objectives are well articulated and consistent, but correlated with the domestic operating environment. BBK's impaired loans ratio had been on declining trend since 2013, supported by write-offs and low impaired loan origination (4.4% at end-2015). However the impaired loans ratio increased to 6% at end-2016 and further to 7.9% at end-1H17 due to the impairment of a small number of the bank's large exposures. Reserve coverage was adequate at 112% at end-2016 but dropped to 75% at end-1H17 due to the increase in impaired loans. We do not expect a further sharp increase in impaired loans; however, the operating environment in Bahrain remains challenging, which might put additional pressure on the bank's asset quality metrics. Despite capital-raising in 2Q16, Fitch views BBK's capital ratios as just adequate in light of the bank's weakening asset quality and high loan book concentration. The Fitch Core Capital (FCC) ratio improved to 14.3% at end-1H17 (12.6% at end-2015) due to higher retained earnings. The Tier 1 regulatory capital ratio was higher at 17.8% at end-1H17 as the bank issued BHD86 million AT1 securities to its shareholders in 2016. Absent any severe credit events we expect the bank's capital ratios to be maintained as loan growth is expected to be moderate. Funding and liquidity indicators remain satisfactory. Despite a drop in customer deposits the loans-to-deposits ratio remained adequate at 83% at end-1H17, slightly above peers' average. Similar to peers, the deposit base in concentrated with the 20 largest deposits representing 42% of the deposit base at end-1H17. These are mainly Kuwaiti and Bahraini government entities given the bank's ownership. Liquid assets including cash less mandatory reserves, net interbank placements, and sovereign and investment-grade securities covered 33% of total deposits at end-2016. SENIOR DEBT Senior debt ratings are aligned with BKK's IDRs. RATING SENSITIVITIES IDRS, SR AND SRF BBK's Long-Term IDR would only be downgraded if both the bank's VR and SRF are downgraded and revised downward respectively. A downgrade of the Bahraini sovereign by one notch would result in a downward revision of BBKs SRF by one notch, reflecting the weakening ability of the sovereign to support its domestic banks. Downside risk to BBK's VR may also arise from further deterioration in the domestic operating environment, asset quality or capitalisation from current levels. SENIOR DEBT The senior debt ratings are sensitive to the same considerations that might affect the bank's Long-Term IDR. The rating actions are as follows: BBK: Long-Term IDR affirmed at 'BB+'; Outlook Negative Short-Term IDR affirmed at 'B' Viability Rating affirmed at 'bb+' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB+' Senior unsecured debt affirmed at 'BB+' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Zeinab Abdalla Associate Director +971 4 424 1210 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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