Fitch affirms Bahrain's BBK at 'A-'; outlook stable

BBK's IDRs and Support rating reflect the extremely high probability that the bank would receive financial support, if needed, given its significant local deposit market share, the government of Bahrain's 32% indirect ownership, and the authorities' ability and strong propensity to maintain confidence in a relatively small banking system. \

The Individual rating reflects BBK's good domestic franchise, satisfactory profitability, improving asset quality and adequate liquidity and capitalisation. It also reflects the bank's market risk exposure and reliance on a relatively small and increasingly competitive domestic market.

In 9M07, operating profits grew a modest 7% yoy to BHD26m and Fitch comprehensive income fell 32% yoy to BHD18m as the bank suffered a BHD7m impairment charge for structured credit investments and a BHD10m loss in fair value of available-for-sale investments. Given current adverse market conditions, some further losses may occur in Q407. Nevertheless, profitability remained satisfactory as loan growth and related fee income recovered, after new regulations in 2005 had curbed growth in consumer finance and margins declined slightly but remained healthy. Cost efficiency also improved modestly.

Asset quality has improved; impaired loans were 5.8% of gross loans with adequate reserves coverage of 74% at end-9M07. Credit risk also arises from credit default swaps written on GCC and Indian sovereign and financial institution names. Liquidity is adequate. BBK's capitalisation has declined modestly but should remain at adequate levels after the issuance of USD275m subordinated debt in Q207 and a BHD50m rights issue in Q407. The bank has significant SIV investments but market risk exposure appears tolerable in light of capital raised and expected 2007 retained earnings.

Established in 1971 as the Bank of Bahrain and Kuwait, BBK offers retail and commercial banking services through 16 domestic branches, supported by a Kuwaiti branch, a Dubai representative office and two branches in India. BBK's largest shareholder is the government of Bahrain through the Pension Fund Commission (19%) and the General Organisation for Social Insurance (13%). Commercial Bank of Kuwait (rated 'A'/ 'F1'/Outlook Stable) is planning to sell its 19% stake in BBK.