Bahrain banking sector still ahead

Bahrain continued to attract foreign, regional and local institutions in 2003, with 30 new licenses issued by the BMA in the year.

In early 2004, BMA granted three more new licenses for banks, while a fourth application has been approved in principle. With the granting of new licenses, the total number of financial institutions regulated by the BMA increased to 362, of which 186 are banks and banking-related institutions, 163 insurance and insurance-related firms and 13 capital market brokers.

With the increase in banking activities, assets of the banks showed robust growth. The asset size of the consolidated balance sheet of the banking system in Bahrain stood at US$94.8bn at the end of Sep 2003, compared with US$73.9bn at the end of 2002, representing a jump of 28.1%.

During the period, net foreign assets of the banking system were US$3.3bn compared with US$3.8bn at the end of 2002. The total domestic assets amounted to US$14.3bn at the end of Sep 2003, an increase of 19.1% over Dec 2002 level.

As of September 2003, the offshore banking units represented 82.5% of the consolidated balance sheet, while full commercial banks and investment banks accounted for 12.3% and 5.2% respectively.

Bahrain has now become the established global Islamic banking hub, with the largest concentration of Islamic banks in the region. In an effort to further consolidate its Islamic banking industry and to gain critical mass the Kingdom continued to attract new Islamic financial institutions.

The BMA has granted a license to a newly formed Islamic banking entity, International Investment Bank (IIB). In addition, the BMA has also granted a license to National Bank of Bahrain to establish a wholly-owned Islamic financing company.

Apart from these developments, some of the Gulf Arab individuals and financial institutions are planning to set up a new Islamic bank in Bahrain somewhere in 2004.

As a result of the various initiatives taken by the Bahraini government to develop it as an Islamic banking hub, the size of Bahrain's Islamic banking and finance industry rose sharply during the first three quarters of 2003.

The total assets of Islamic banks and financial institutions operating in Bahrain stood at US$3.65bn at the end of September 2003, which was an increase of 25.3% over its 2002-year end level. Islamic banks continued to develop new products and financing structures. In another major development, Islamic banks are witnessing spurt in aircraft financing.

In addition to almost 90 onshore units, the Bahraini banking system is dominated by around 51 offshore units. Although offshore banking units (OBUs) faced some difficulties in the last quarter of 2002 on the back of rising regional uncertainties, they have seen their asset base recovering in the second and third quarter of 2003.

The total assets of the OBUs stood at US$78.1bn at the end of September 2003, which represents 32.9% jump from 2002-end level. The total assets of the OBUs witnessed substantial rise after the end of Iraq war, as it increased by 42.8% in the second quarter of 2003.

Some of the OBUs which parked their funds outside the country at the end of 2002 due to impending war in Iraq, returned their assets after the end of tension in the region. Now, the total assets of the OBUs are more than 9 times the country's GDP.

This indicates the importance of OBUs in the overall economy of the Bahrain. Bahrain's investment banks continued to show robust performance in the first three quarters of 2003. The consolidated balance sheet of investment banks rose to its 10-year high to US$4.86bn at the end of September 2003, an increase of 8.4% over 2002. Domestic assets increased by 25.3% to US$893.1mn as of Q32003.

Commercial banks in Bahrain recorded outstanding performance in the first nine months of 2003. Most of the local listed commercial banks showed higher earnings for the period compared to 2002. The trend that underpinned earnings in 2002 continued into the year 2003 and margins expanded further as the banks enjoyed record low levels of cost of funds.

This coupled with an upbeat lending market further supported the bank earnings for 2003. The consolidated balance sheet of full commercial banks (FCBs) in Bahrain rose to a 10-year high to stand at BD4.4bn at the end of September 2003, an increase of 10.2% over that of 2002.

The non-performing loans of all the commercial banks based in Bahrain stood at US$250mn as of Dec 2002 while the banks had provided for 84.4% of their NPLs during the same period. Non-performing loans to loans stood at 11.4% as of 2002 as compared to 11.2% in the previous year.

In line with the increase in economic activity, total loans and advances extended to residents by commercial banks increased by 8% during the first nine months of 2003 and stood at BD1.76bn, compared with BD1.63bn at the end of December 2002.

The sectoral distribution of total outstanding loans indicates that 47.5% of the loans were in the form of business lending, while personal and government sector accounted for 44.5% and 7.9% respectively.

Most banks in Bahrain have reported healthy growth in assets and earnings during the first nine months of 2003. For example, nine months profit of National Bank of Bahrain surged by 12.3% to BD18.1mn over the corresponding period in 2002, while that of Ahli United Bank rose by 52.4% to US$70.9mn and BBK's profit improved by 16.9% to BD16.8mn during the same period. Bahraini banks have benefited from major fall in interest rates across the globe.

Recent growth in deposits within the banking sectors indicate that investors are less inclined to take on overseas equity-risks, resulting in surplus liquidity being kept within the region.

Also, declining interest rates have provided capital gains on fixed income investments like treasury bills and development bonds. Overall, the banks in Bahrain have prudently managed their interest rate spreads between assets and liabilities, thereby achieving higher net interest income.

The Bahraini banking and finance industry faces a strong threat from its regional rivals. Dubai is aggressively marketing the Dubai International Financial Centre (DFIC), initiative which has the potential to undermine the Bahrain's role as the regional financial hub.

Despite the competition from Dubai, the Kingdom continued to attract new banks. The fast changing operating environment has forced many of the banks operating in Bahrain to change their strategies.

In view of the increasing competition, the banking sector in Bahrain is also experiencing some fundamental changes in its operations. Taib Bank, which incurred losses in 2002, announced its intention to become a private bank focusing on serving high-net-worth individuals, families and institutional clients.

The emerging competitive landscape is going to change the face of banking industry in Bahrain. Banks are expected to strengthen their position through consolidation in the region in order to compete effectively with international banks. Already the Bank of Bahrain & Kuwait (BBK) and Ahli United Bank BSC (AUB) have declared their intentions of scouting for merger partners in the region.

The first nine months of 2003 have witnessed excellent performance by the listed commercial bank segment in Bahrain. The prevalent low interest rate regime took its toll on the interest income of the bank as most of the banks reported decline in their interest income over the corresponding period last year.

As a result most of the banks have not been able to maintain positive growth in their net interest income. However, except Bahraini Saudi Bank other banks managed to increase their non-interest income.

This coupled with cost cutting exercise bodes well for the banks as most of the banks reported increase in their profitability. In 2003, the commercial banking index far outstripped the BSE Composite Index amidst heightened activity in the banking sector.

Most of the bank stocks performed well during 2003 and scaled new highs. The commercial banking index gained almost 50% in 2003. Commercial banking sector, which was also by far the most active sector on the BSE in 2003, accounted for 63% of the value of shares traded at the end of 2003.

In terms of volume of shares traded, the share of commercial banks was even higher at 83.7%. In 2003, Ahli United Bank was the star performer with a gain of 75.7% over that of its 2002 levels followed by Bahrain Islamic Bank (54.3%), Bank of Bahrain & Kuwait (42.6%) and National Bank of Bahrain (32.8%). Bahraini Saudi Bank was the only loser amongst the commercial banking sector shedding 23.4% of its value during the year.