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Fitch affirms BMB Investment Bank; negative outlook

Fitch Ratings has affirmed BMB Investment Bank’s Long-term Issuer Default Rating (IDR) at ‘B-‘ and removed it from Rating Watch Negative (RWN). The Outlook is Negative. A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers – IDRs and Viability Rating (VR)

Fitch placed BMB on RWN on 17 June 2013 reflecting concerns about BMB’s future strategy, potential legal and reputational risks, and further potential losses, following the announcement by the newly appointed Chief Executive Officer of “unauthorised transactions – potentially involving fraudulent activities” by the bank’s previous management team, who had been dismissed. The bank reported significant losses in 1Q13 relating to these transactions.

The affirmation and removal from RWN follows Fitch’s review of the bank’s progress to end-9M13. While Fitch believes that the losses stemming from these transactions are now more or less quantified, the Negative Outlook reflects the on-going uncertainty surrounding BMB’s business model, sustainable earnings generation and risk management oversight. Fitch notes that BMB’s new management has made efforts to improve risk management in recent months. However, the success of this new framework needs time to be assessed.

BMB’s IDRs are driven by its VR (i.e its standalone strength). The VR reflects BMB’s weak profitability, limited business activities, relatively high exposure to market risk through its remaining legacy investments in private equity funds, concentrated wholesale funding profile and small equity base. Fitch also considers the bank’s achievements in reducing its exposure to private-equity fund commitments and its improved liquidity profile in recent years.

Rating Sensitivities – IDRs and VR

BMB’s Long-term IDR is sensitive to the same considerations that would affect the VR.

Upside potential for BMB’s VR is limited at present, as reflected in the Negative Outlook on the bank’s Long-term IDR. A revision of the Outlook to Stable would require sustainable profitability, successful implementation of the bank’s new strategy and revised business model, and indications that the bank’s corporate governance and risk management oversight have materially improved.

Downside risk to the VR and IDRs would be likely if BMB reported further large losses, eroding the bank’s capitalisation from its current level, or failed to develop a sustainable business model.

Key Rating Drivers – Support Rating and Support Rating Floor

The Support Rating is based on Fitch’s view that BMB would be unlikely to receive solvency support from the Bahraini authorities, if needed, given its wholesale bank status. Support might be possible from its majority shareholder, but cannot be relied upon.

Rating Sensitivities – Support Rating and Support Rating Floor

Fitch does not expect any change to its view of potential sovereign or institutional support.

Established in 1982, BMB is a small, niche wholesale bank operating from a single branch in Bahrain. BMB’s shares are listed on the Bahrain Stock Exchange. The bank has historically focused on investments in private equity funds and is currently focusing on trade finance. Al Fawares Holding, a Kuwaiti conglomerate, is BMB’s main shareholder with a 64.5% holding.

The rating actions are as follows:

Long-term IDR affirmed at ‘B-‘; removed from RWN; Negative Outlook
Short-term IDR affirmed at ‘B’; removed from RWN
Viability Rating affirmed at ‘b-‘; removed from RWN
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘NF’