Bahrain's investment banking crisis (page 1 of 2)

Regulators have hammered the final nail into the coffin of the failed Bahrain International Bank.

In early May, the bank's lenders and depositors signed an agreement on an asset realization protocol for the bank - in effect, cutting their losses and taking what they could get from the once thriving boutique investment institution. Shareholders had already backed the deal: they gave their approval during an extraordinary general assembly meeting in January.

The Bahrain Monetary Agency, the country's central bank and financial regulator, brokered the deal. 'It has been quite a task to get all the parties on board,' admitted Khalid Ateeq, executive director of banking supervision at the BMA.

'We now look forward to the implementation of the ARP, in the best interests of everyone involved. The ARP takes into account the interests of all concerned parties and it represents the best way forward for the bank.'

The move brings to an end one of the sorriest episodes in Bahrain's recent banking history. For 20 years, BIB epitomized the success of Bahrain's offshore banking sector - it was small, nimble and highly profitable.

The same was broadly true of its local rival, BMB Investment Bank. Both made their money mainly by investing cash for wealthy Gulf clients in Western markets. Both banks saw earnings soar during the bull run of the 1990s.

But things started to turn sour around the turn of the millennium, when US and European securities markets nosedived. Both banks lost money on holdings of US and European securities, particularly corporate bonds.

Even investments in successful companies went wrong as liquidity dried up: BIB and BMB were significant private equity investors in a number of solid US firms, but weak stock markets meant they could not easily exit those investments. Both defaulted on loans to Western banks in 2002.

'BIB had generated significant losses and needed fresh equity injection, which apparently was not forthcoming,' says Shahid Hameed, head of asset management at Securities and Investment Company in Bahrain.

'BMB had also accumulated significant losses and was facing liquidity problems. Some time back, BMB was looking to undertake a capital restructuring exercise where the accumulated losses would be set off against the capital of the bank. This would have cleaned up the balance by way of capital reduction. Subsequently, the bank was looking to go increase its capital by way of a rights issue.'

While BIB has breathed its last, BMB is still fighting for its life - and management says it is confident the bank will pull through. However, Darren Stubing, chief banks analyst at ratings agency Capital Intelligence in Cyprus, says the incidents have dealt a blow to Bahrain's credibility as a sound banking center.

'There have been some negative repercussions for Bahraini banks, particularly investment banks. It has made it slightly more expensive for them [to borrow money from international banks]. Two banks in Bahrain defaulted, and that has negatively affected the risk profile of Bahrain. I wouldn't want to over-embellish the impact.

'The international banking community still thinks that, for the Gulf, Bahrain has strong reputation for being pretty open,' says Stubing.

'The Bahrain Monetary Agency hasn't tried to sweep this under the carpet, which is good. But some banks may be asking 'Did the BMA take its eye off the ball?'

With Dubai breathing down Bahrain's neck in the battle to become the region's premier banking hub, this could prove damaging to Bahrain's plans to promote Bahrain Financial Harbor as the finance capital of the region.