Rating drivers: IDRS, support rating, senior debt and subordinated debtBBK's IDRs, Support Rating and Senior Debt rating reflects Fitch's view of a high probability of support from the Bahraini authorities ('BBB'/Stable) if required, given BBK's importance to the banking system, its 32% ownership by the government and the track record of support for domestic banks. In Fitch's view, the extremely high probability of support from Bahrain would also extend to subordinated debt. Therefore, the subordinated debt rating is notched from BBK's Long-Term IDR rather than from the VR as is typically applied in countries outside the region.
Rating sensitivities: IDRS, support rating, senior debt and subordinated debtBBK's support-driven IDRs, Support Rating and Senior Debt rating are sensitive to a rating action on the sovereign rating of Bahrain, or a change in Fitch's view on the willingness of the authorities to support the bank. This is considered unlikely at present. The subordinated debt rating is sensitive to any movement on BBK's Long-term IDR.
Rating drivers: viability ratingThe VR is underpinned by BBK's satisfactory and fairly resilient financial metrics despite the uncertain operating environment in Bahrain. Its well-established franchise and satisfactory funding and liquidity indicators are important rating factors. Net income increased 33% yoy in 2012, underpinned by healthy growth in net interest income, fees and commissions, and notably lower impairment charges. Fitch expects a moderate improvement in profitability in 2013.
The NPL ratio remained elevated at 9.2% and restructured loans amounted to a further 5.5% of the loan book at end-2012 (2011: 9.3%), implying that asset quality could remain weak for some time. This is compensated by adequate reserve and collateral coverage, in Fitch's view.
BBK is well funded by its strong customer deposit base, reflecting its position as a leading Bahraini bank. Deposits grew by 7% yoy in 2012, following strong growth in 2011 due partly to a "flight to quality" following the social unrest. BBK's largest depositors include the governments of Bahrain and Kuwait due to strong ownership factors, and these deposits tend to be stable.
Fitch views BBK's liquidity position as comfortable. Refinancing risk is low, with the next significant debt maturity in 2015. The bank displays healthy balance sheet liquidity, with a Fitch-calculated loans/deposits ratio of 73% at end-2012. In addition, BBK has access to an ample pool of liquid assets, primarily in the form of interbank placements, government bond holdings and cash. The Fitch core capital ratio increased to 14% at end-2012 (end-2010: 13%), boosted by retained earnings and positive mark-to-market gains on the bank's available for sale securities portfolio. Given the moderate potential for weaker asset quality because of BBK's high exposure to the Bahraini economy, Fitch considers capitalisation to be adequate but not strong.
Rating sensitivities: viability ratingUpside potential to the VR is somewhat limited at present, given the challenging socio-political backdrop in Bahrain. Downside risk to the VR could arise if the social-political situation were to materially escalate (which Fitch does not expect) or if asset quality were to notably deteriorate, impacting the bank's capital position.
BBK offers retail and commercial banking through a wide domestic network and has a presence in Kuwait, India and Dubai. Bahrain's 32% stake is held through the state social insurance and pension fund organisations. Kuwait holds 18.7% through the Kuwait Investment Authority. BBK has the second-largest domestic market share in Bahrain and its strategy is to further expand its franchise both in Bahrain and regionally.
The rating actions are as follows:
Long-term IDR affirmed at 'BBB-', Outlook Stable
Short-term IDR affirmed at 'F3'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB-'
Senior unsecured debt affirmed at 'BBB-'
Subordinated debt affirmed at 'BB+'.