November 2, 2017 / 2:24 PM / a year ago

Fitch Affirms National Bank of Bahrain at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) LONDON, November 02 (Fitch) Fitch Ratings has affirmed National Bank of Bahrain's (NBB) 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 SRF NBB's IDRs are driven by the standalone strength of the bank as reflected by its VR. The IDRs are also underpinned by potential sovereign support as reflected by the bank's Support Rating Floor (SRF) of 'BB+'. NBB'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 NBB 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. NBB's main shareholder is the Bahraini state through the wholly owned Mumtalakat Holding Company; the Bahraini sovereign wealth fund (44.2%) and the Social Insurance Organisation (10.9%). The rest of the bank's share capital is widely held by the citizens of and entities incorporated in Bahrain. VR NBB's VR is capped by the operating environment in Bahrain, and more specifically by the Bahrain sovereign rating. NBB is a predominantly 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. The bank has a solid domestic franchise with a well-entrenched retail and corporate banking franchise, but limited competitive advantage compared to more geographically diversified peers. The bank has an adequate management team, which is highly experienced in local banking. NBB's strategic objectives are well-articulated and consistent, but correlated with the domestic operating environment. NBB has adequate asset quality despite a high headline impaired loans ratio of 9% at end-1H17. This is inflated by one large impaired exposure since 2012, representing about 45% of total impaired loans. Reserve coverage was adequate at 51% at end-1H17 but weaker than peers' average. However, the bank holds adequate collateral against exposures that are not fully provided for. Similar to domestic and regional peers, the loan book is concentrated by single obligor with the 20 largest exposures representing 1.2x Fitch core capital (FCC) at end-1H17. NBB continues to demonstrate healthy profitability ratios with operating return on average total assets of 2.2% in 6M17, which compare well against peers' average. The bank repriced its loan book upwards in 2016, which helped lift its net interest income (NIM) to 2.7% in 6M17 . The deposits base also decreased slightly in 2016 due to the withdrawal of some government and government related entities (GREs) deposits given tightening liquidity, which reduced pressure on its margins. NBB is maintaining control of its cost base, with a cost-to-income ratio of 36% in 2016, which was lower than most peers' and is likely to remain around that level as we expect the bank's operating income to remain healthy. NBB has healthy capitalisation, reflecting both its strong capital base and low risk profile. The bank's average FCC ratio has been around 35% in the past four years (36% at end-1H17). However, capital ratios benefit from 0% risk weighting on Bahraini sovereign securities, which represent about half of the bank's balance sheet. The equity-to-assets ratio was lower at 14% at end-1H17 but still compares well with peers'. The total regulatory capital ratio was 36% at end-1H17, comfortably above the minimum regulatory capital requirements. NBB is mainly funded by customer deposits representing more than 80% of its non-equity funding. The deposit base is concentrated, which are mainly government and quasi government depositors. NBB's liquidity is comfortable. The loans-to-deposits ratio was only 52% at end-1H17, lower than peers' average as the bank's loan book represents only about a third of total assets. RATING SENSITIVITIES IDR, VR, SR AND SRF NBB'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 NBB's SRF by one notch, reflecting the weakening ability of the sovereign to support its domestic banks. Downside risk to NBB's VR may also arise from further deterioration in the domestic operating environment or asset quality. The rating actions are as follows: NBB: 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+' 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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