CI Ratings has lowered Oman Arab Bank’s FSR, affirmed National Bank of Bahrain’s FCRs, and assigned a ‘BBB’ rating to a bond issue by Gulf Bank.
Capital Intelligence Ratings (CI Ratings) has lowered Oman Arab Bank’s Financial Strength Rating, affirmed the National Bank of Bahrain’s Long- and Short-Term Foreign Currency Ratings, and assigned a ‘BBB’ issue rating to the KWD 100 million subordinated bond issue by Gulf Bank.
Following the very recent downgrade of the Sultanate of Oman’s sovereign rating, CI Ratings has lowered Oman Arab Bank’s (OAB) Financial Strength Rating (FSR) to ‘BBB’ from ‘BBB+’.
The downgrade is based on the ongoing and highly negative impact of the lower oil prices on Oman’s fiscal and economic strength and its effect on the operating environment, as well as the sovereign’s ability to support the banking system.
The Bank’s rating is supported by the generally good financial metrics in terms of its sound Basel III capital adequacy ratio (CAR) and the sustained improvement in loan asset quality indicators. The rating also reflects the Bank’s strong corporate franchise and large customer deposit base.
OAB’s rating is however constrained by the high level of special mention loans, together with the likelihood that the robust loan growth over the past few years may translate into increased non-performing loans (NPLs) in the face of a challenging operating environment.
The fairly high customer concentration in both loans and customer deposits and the declining trend of both operating and net profitability are other constraining factors.
OAB’s Foreign Currency Ratings are also lowered to ‘BBB’ Long-Term and ‘A3’ Short-Term. Taking into account the ownership, management and support of Arab Bank Jordan, the Support Level is maintained at ‘2’, reflecting the high likelihood of support from its relatively sound major shareholders, as well as the government.
A ‘Negative’ Outlook is also assigned to all the ratings as is the case with its peers. The ‘Negative’ Outlook largely reflects the weakening of the operating environment for banks as indicated by the slowdown of economic growth, as well as the potential impact on loan asset quality going forward, the possible tightening of market liquidity given the issuance of government bonds and treasury bills and reduced consumer confidence. A weakening of related ratios would thus exert further downward pressure on the Bank’s ratings.
In 2015, OAB’s operating and net profitability ratios registered a further decline, although this trend mirrored that of most of its peers and the sector, and is a reflection of the high competition in a relatively small market. The narrowing of net interest margin and its relatively high operating cost base, as well as higher cost of risk continued to constrain earnings growth.
OAB was established in 1984 after it acquired the Omani branches of Arab Bank. Arab Bank subscribed to 49% of OAB’s share capital and Omani shareholders took 51%. Arab Bank manages OAB and is closely involved in the running of the Bank. The Bank’s local shareholder is Ominvest, the country’s oldest investment company, whose shares are widely held by Omani individuals and enterprises; OAB itself owns 5% of shares. OAB is the only major commercial bank that is not listed in Oman. Plans for an IPO have been shelved indefinitely. At end 2015, the Bank had assets totaling OMR 2.0 billion (USD 5.2 billion) and an equity base of OMR 226 million (USD 588 million). It reported a net profit of OMR 29.0 million (USD 75 million) in 2015, representing a modest 2.2% growth over the year earlier.
National Bank of Bahrain
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 USD 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.
Although the net interest margin has narrowed in recent years, the Bank’s operating profitability remains strong and provides the flexibility to step up provisioning if necessary.
NBB was incorporated in 1957 as the first locally registered Bahraini bank. The Bank operates under a retail bank licence issued by the CBB and is 44.2% owned by Bahrain Mumtalakat Holding Company (Mumtalakat), the 100% state owned investment arm of the Kingdom of Bahrain. NBB offers a comprehensive range of commercial and retail banking services through its network of 25 branches throughout Bahrain. As at end-March 2016, the Bank’s total assets amounted to BHD 2.95 billion (USD 7.85 billion) and total capital was BHD 328 million (USD 872 million).
Gulf Bank
CI Ratings has assigned a ‘BBB’ issue rating to the KWD 100 million subordinated bond issue by Gulf Bank. The Outlook on the rating is ‘Stable’.
Given the subordinated bond’s contractual point of non-viability loss absorption characteristics, the issue will qualify as Tier 2 Capital under the Central Bank of Kuwait’s (CBK) Basel III implementation.
The rating of the bond is supported in particular by the good and improved underlying asset quality and particularly strong loan-loss reserve (LLR) coverage, by the strong CET-1 capital base and by the sound profitability at the operating level that results from an established business franchise.
The main constraining factors remain the concentrations in the customer deposit base and in the loan book in terms of industry sector and the maturity mismatches in the balance sheet – although (as with all banks in Kuwait) these are closely monitored by the Central Bank.
However, although deposit concentration is marked, this constraint is considerably mitigated by the governmental nature of most of the large depositors.
The weak bottom line profitability is considered to be only a limited constraint in view of the strength of operating profitability and the very strong effective coverage ratio for non-performing loans (NPLs).
The terms and conditions applying to the issue include a ‘non-viability clause’. This essentially allows the CBK – at its sole discretion – to require the bond to be written off in its entirety.
While there have been no clear guidelines issued as to precisely what financial metrics would trigger this course of action, it has been assumed that such a trigger would not be activated as long as the capital adequacy of the Bank remains above the CBK’s minimum (currently 13%) – with this calculation being made after the Bank has complied with mandatory provisioning requirements.
Moreover, it is clear from the wording of the issue prospectus that either action would be expected to precede any governmental support being made available. Therefore, the starting point for assigning a rating has to be a rating that specifically excludes governmental support – i.e. the Financial Strength Rating (FSR) of the Bank (see Gulf Bank Rating Report dated January 2016). This is currently ‘BBB+’. Given the specific features of the proposed bond issue including its subordination, CI Ratings’ view on how the CBK is expected to resolve a distressed bank and the FSR assigned to the Bank, the assigned rating is accordingly lowered by one notch to ‘BBB’.
As the adoption of Basel III in Kuwait is still a ‘work in progress’, it is likely that more detailed guidance on the issue of Basel III–compliant debt capital instruments will emerge over time. Depending on their contents, the notching may change at some point in the future – either upwards or downwards.
Gulf Bank performed very strongly in both 2014 and 2015 in terms of asset quality, whilst maintaining a good capital position. This, together with a comfortable KWD liquidity position (and in a market in which raising additional time deposits is still possible) means that Gulf Bank is well placed to selectively resume asset growth.
Although the Kuwaiti operating environment is also improving it remains challenging and geopolitical risks have increased in recent weeks. Despite the fall in oil prices, the Kuwaiti government has not cut back on investment.
On the contrary, contract awards have been accelerating as long-delayed (and badly needed) infrastructure investment is moving forward at a faster pace than at any time over the last five years.
This should mean greater corporate loan demand and more demand for both contract guarantees and import letters of credit – and all banks will benefit. As regards profitability, for Gulf Bank future provisioning levels are now (in theory at least) discretionary in that LLR coverage is strong.
Subject to Central Bank approval (in a system where the latter is known to favor very strong levels of LLR coverage, with all banks building up excess general provisions), management may therefore be able at some point to moderate the level of provisioning and use more of operating profit to grow Tier 1 equity and to pay a cash dividend.
Capital Intelligence Ratings (CI Ratings) can be found at http://www.ciratings.com.