Fitch affirms BMB Investment Bank at 'B-', revises outlook to positive

The revision of the Outlook to Positive reflects the bank's success in de-leveraging its balance sheet, paying down legacy financial obligations and funding commitments as and when they fall due and reducing its reliance on investments in private equity funds to drive profitability.

Fitch notes the increasing contribution to operating revenues from more stable fees and commissions in 2011 and H112, following BMB's change of strategy to develop new business lines, which include trade finance, capital markets trading activities and asset management.

BMB's IDRs are driven by its VR, and so the Long-term IDR is highly sensitive to any rating action on the VR. The Support Rating is based on Fitch's view that BMB would be highly unlikely to receive solvency support from the Bahraini authorities, if needed, given its wholesale bank status.

BMB's VR reflects its small but growing wholesale banking franchise, relatively high exposure to market risk, concentrated wholesale funding profile and small equity base.

The agency also considers the bank's achievements in reducing its exposure to private-equity commitments, its improving operating performance since the change in management in 2009 and success in the implementation of its new corporate strategy which includes, amongst others, diversifying earnings into more stable, recurring revenue streams.

Upside potential for the VR could arise from diversification of the bank's major wholesale funding sources, which remains limited at present. Continued progress in growing the bank's franchise could also be a positive rating driver. Downside risk to the VR is limited considering its low level.

In H112, net income was $1.8m (H112: $1.5m on an underlying basis), with a growing contribution to profitability from fees and commissions. Fitch recognises BMB's success in materially cutting operating costs in recent years, but notes that its cost/income ratio remains relatively high (H112: 64%) and will continue to be so until the bank sufficiently grows its revenues. At end-H112, investments in proprietary private equity funds still represented about one-third of total assets, with a large portion of the portfolio expected to be realised within the next 24 months.

Fitch considers BMB's funding profile as a relative weakness in its risk indicators, given its undiversified nature. The bank has been largely funded by a government and a quasi-government entity (obtained pre-2008), which amounted to 56% of total non-equity funding at end-H112. Following the rescheduling of its obligations in 2010/2011, BMB fully repaid the final instalment of a significant legacy quasi-government term deposit during H112, and a legacy term finance facility is expected to be fully repaid in March 2013. The bank has since been able to attract alternative sources of funding in the form of interbank lines and repurchase agreements (repos) obtained against its trading book. The switch in BMB's business model to shorter-term trade finance activities, together with its portfolio of liquid assets, has notably improved the bank's liquidity profile, with 46% of BMB's total assets now maturing in one year or less (32% in three months or less). Additional anticipated private equity redemptions in 2013 and 2014 should further improve the liquidity of BMB's balance sheet.

Fitch notes BMB's comfortable capital position, with regulatory Tier 1 and Fitch core capital ratios of 24.4% and 30.4%, respectively, at end-H112. Despite this cushion, capital may need to be boosted if the bank is to support meaningful business growth, in Fitch's view.

Established in 1982, BMB is a small, niche wholesale bank operating from a single branch in Bahrain. It offers its Middle-East-based high-net-worth and institutional clients a range of trade finance, asset management and investment banking services. BMB's shares are listed on the Bahrain Stock Exchange. Al Fawares Holding, a Kuwaiti conglomerate, is BMB's main shareholder with a 64.5% holding.