Fitch upgrades BMB Investment Bank to 'B-', outlook stable

Fitch has also affirmed BMB's support rating of '5' and Support Rating Floor of 'NF'. The outlook for the long-term IDR is stable.

The upgrade reflects BMB's improved financial position following timely payment of the first three scheduled instalments on its medium-term syndicated loan facility. BMB also appears adequately placed to meet the final, though largest, such payment of USD28.5m in Q208 given expected investment income in H207. The ratings also reflect the bank's modest franchise and capital, and considerable indirect exposure to market risk from private equity investments.

In Q402, BMB was unable to roll over a USD75m loan due to adverse market conditions, regional political risk and concerns about the bank's prospects. In Q404 BMB signed an agreement with its creditors and USD29.7m has been repaid to them so far. Despite its default, BMB was able to continue as a going concern due to the strength of its private equity funds portfolio.

BMB's franchise is modest, but it should benefit from the currently buoyant Gulf operating environment, where high oil prices and rising levels of liquidity are leading to increasing demand for the niche investment products offered by BMB, such as private equity funds.

Performance has improved since 2004, when the bank returned to profitability, but income from investments in private equity funds is the largest source of income, which results in earnings volatility and performance is considerably exposed to market risk. The bank aims to cautiously expand activities now that its financial position has somewhat stabilised.

BMB's capital base is small, but capitalisation has improved following increased earnings and a USD52.3m capital increase in Q305. BMB is confident it can meet Basel II capital requirements, despite the negative effect Basel II implementation is likely to have on capital ratios. Following the capital increase, Al-Fawares Construction and Development, a private Kuwaiti conglomerate, became BMB's largest shareholder with a 65% stake. Fitch believes financial support from either its majority shareholder or from the Bahraini authorities, although possible, cannot be relied upon.

BMB is a niche investment bank offering its Middle East-based clients a broad range of private equity funds managed by established international fund managers. BMB's shares are listed on the Bahrain Stock Exchange.