NBB’s and BBK’s Support Ratings (SRs) and Support Rating Floors (SRFs) reflect Fitch’s expectation of a high probability of sovereign support from the Bahraini authorities, if required. Our view of support is based on the banks’ systemic importance as major retail and corporate banks in Bahrain, and the Bahraini authorities’ high propensity to support domestic commercial banks. The Bahraini government holds significant stakes in both banks: 32 per cent at BBK and Bahrain Mumtalakat Holding Co, the investment arm of the Government of Bahrain, holds a 44.2 per cent stake in NBB, which also is a factor in Fitch’s view on sovereign support.

ABC’s Support Rating is driven by potential institutional support from its founding shareholders, the Central Bank of Libya (CBL) and the Kuwait Investment Authority (KIA). While support from the CBL is difficult to assess, Fitch expects some support from the KIA.

Although the Central Bank of Bahrain (CBB) regulates all licenced banks in Bahrain, Fitch does not factor any Bahraini sovereign support in the ratings of the wholesale banks, GIB and ABC.

AUB’s IDR and Support Rating reflect the high probability of institutional support from its core shareholder, the Public Institute for Social Security (PIfSS), an arm of the State of Kuwait (AA/Stable), which holds an 18.9 per cent stake. The very strong links between PIfSS and AUB date back to before the creation of AUB, and include PIfSS’s strong interest as shareholder in both AUB and its Kuwaiti subsidiary (12.2 per cent stake). However, support from PIfSS is constrained by Bahrain’s Country Ceiling (BBB+) and the Stable Outlook reflects that on the Bahraini sovereign rating.

GIB’s IDR and Support Rating are driven by Fitch’s expectation of an extremely high probability of support from the bank’s longstanding majority shareholder, the Public Investment Fund of Saudi Arabia (AA/Negative; 97.2 per cent stake), despite the bank being licenced and headquartered in Bahrain. Our view of support is driven to a large degree by the bank’s ownership and a strong track record of support, which has been clearly demonstrated in the past, and is the main reason GIB’s IDR and SRF are above those of all but the largest Saudi banks. The ratings are not constrained by the Bahrain Country Ceiling, reflecting that the majority of GIB’s assets and liabilities are outside of Bahrain, and would not be subject to Bahraini convertibility risks, in Fitch’s view.

The loan books of each of the Fitch-rated Bahraini banks have different geographic risk profiles as a result of their different business models and strategies. As wholesale banks, ABC and GIB have very limited exposure to Bahrain, despite being headquartered there. The domestic retail banks (BBK and NBB) are more constrained by the local operating environment. AUB is geographically diversified, with significant operations in Kuwait and elsewhere in the Middle East and the UK, with Bahrain on-shore operations contributing less than 13 per cent of AUB’s profit.

NBB’s VR is constrained by the bank’s reliance on a small and competitive domestic environment and concentrations in both loans and deposits. The VR also factors in the bank’s strong capitalisation, leading domestic franchise, solid funding profile, and improving asset quality from a fairly high impaired loan ratio. 

BBK’s VR is constrained by the bank’s concentrated loan book and its dependence on the undiversified Bahraini market. The VR also factor in the bank’s solid and well-established franchise, adequate capitalisation and satisfactory financial performance, despite the uncertain operating environment in Bahrain. 

AUB’s VR reflects the bank’s diversified franchise, with operations across the GCC, specifically in Kuwait, its sound asset quality despite its exposure to higher risk Middle East/North Africa (MENA) markets such as Egypt and its solid operating profitability. Asset quality metrics compare well with peers. The VR also takes into account loan book concentrations, somewhat mitigated at group level by geographic and sector diversification. The rating also reflects capitalisation ratios that although adequate, are low compared with domestic and regional peers.

ABC’s VR factors in the bank’s geographic diversification; in particular, its Brazilian subsidiary, Banco ABC Brasil S.A. (BABC: BBB-/Negative), which remains a significant contributor to the group’s overall profitability despite the effects of the weaker operating environment in Brazil. The Brazilian operation provides the bank with diversified earnings but could also expose the bank to increasing risks outside of its home market. The rating also takes into account ABC’s strong capitalisation, while also considering concentrations on both sides of the balance sheet (although lending concentrations are lower than those of peers) and its exposure to volatile markets in the MENA region. 

GIB’s VR reflects the bank’s comfortable liquidity and solid capitalisation and its somewhat more conservative risk appetite than domestic peers, in Fitch’s view. It also factors in GIB’s low operating profitability and the execution risks of expanding into retail banking in Saudi Arabia, although Fitch expects GIB will maintain a conservative risk appetite.

The subordinated debt of AUB and BBK is rated one notch below the banks’ respective Long-term IDRs, reflecting Fitch’s view that institutional support (AUB and GIB) and sovereign support (BBK) would flow through to all senior and to currently outstanding subordinated debt issuance, even though, as per Fitch’s criteria, subordinated debt would typically be notched down from the VR. ABC’s subordinated debt is notched down from its Long-term IDR, although this is driven by its VR. The one notch reflects loss severity relative to average recoveries.

A downgrade of NBB’s and BBK’s IDRs would require downgrades of both the VRs and the SRFs, since they are both ‘bbb-‘. The SRs and SRFs are sensitive to a weakening of the Bahraini authorities’ ability to provide support, as reflected in Bahrain’s sovereign rating, or reduced propensity to support the largest Bahraini banks. 

AUB’s IDR and SR are sensitive to a change in Fitch’s view of PIfSS’s ability or propensity to provide support or to changes in Bahrain’s Country Ceiling. The IDRs would be downgraded if Bahrain’s Country Ceiling was revised downwards or if Fitch believes that PIfSS’s ability or willingness to support has diminished, including as a result of a significant increase in country risk.

GIB’s IDR and SR are sensitive to a change in Fitch’s expectation of Saudi Arabia’s propensity to support the bank, or a downward revision of the SRFs of Saudi Arabia’s banks. We do not consider GIB’s SRF should be above that of the larger Saudi banks (currently A+/Negative); and it would be downgraded in the event of a multi-notch downgrade of the larger Saudi banks’ SRFs. As GIB’s IDRs are not constrained by the Bahrain Country Ceiling (it is headquartered in Bahrain but does almost no business there, its exposure and funding is largely Saudi and other GCC countries), its IDR is not sensitive to negative rating action on the Bahraini sovereign.

ABC’s SR is sensitive to a change in Fitch’s view of the ability or willingness of CBL and KIA to provide institutional support, as needed. ABC’s IDR is sensitive to changes in its VR.

Both NBB’s and BBK’s VRs are sensitive to deterioration of the Bahraini operating environment; as both are domestic banks and have significant exposure to the sovereign and the domestic economy. 

Downside risk to BBK’s VR could also arise if asset quality or capitalisation considerably weakens from current levels.

Downside risk to NBB’s VR might arise from further deterioration in asset quality. 

AUB’s VR is sensitive to asset quality or liquidity deteriorations or if its Fitch core capital (FCC) ratio is severely eroded. Upside potential is currently limited, considering concentration in the loan book as well as the uncertain operating environment in Bahrain and elsewhere in the Middle East, notably Egypt.

ABC’s ratings are sensitive to the on-going political uncertainty in Libya, and the risk of an escalation of political and social unrest in any of its markets (Bahrain, Brazil, MENA generally). A material deterioration in the profitability and asset quality of ABC’s Brazilian subsidiary could also have a negative impact on the ratings, in light of its significance to the group’s profitability. 

Downside risk to GIB’s VR could arise from a prolonged delay in the new retail strategy becoming profitable and negative developments eroding the bank’s healthy capital buffer. These could come, for example, from uncontrolled loan growth, a spike in NPLs or rapid expansion into new international investments, none of which are in Fitch’s base case assumptions. An upgrade would likely result from improved profitability metrics and tangible evidence that the new expansion strategy is successfully gaining traction.

The senior and subordinated debt ratings are sensitive to the same considerations that might affect each of the bank’s Long-term IDRs. In addition, AUB’s and BBK’s subordinated debt ratings are sensitive to any potential change in Fitch’s assumptions relating to support in the Gulf for bank subordinated debt.

The rating actions are as follows: 

AUB:
Long-term IDR affirmed at ‘BBB+’; Stable Outlook
Short-term IDR affirmed at ‘F2’
Viability Rating affirmed at ‘bbb’
Support Rating affirmed at ‘2’
Senior unsecured debt affirmed at ‘BBB+’/’F2’
Subordinated debt affirmed at ‘BBB’

ABC:
Long-term IDR affirmed at ‘BBB-‘; Stable Outlook
Short-term IDR affirmed at ‘F3’ 
Viability Rating affirmed at ‘bbb-‘ 
Support Rating affirmed at ‘3’
Senior unsecured debt affirmed at ‘BBB-‘ 
Subordinated debt affirmed at ‘BB+’ 

BBK:
Long-term IDR affirmed at ‘BBB-‘; Stable Outlook
Short-term IDR affirmed at ‘F3’
Viability Rating affirmed at ‘bbb-‘ 
Support Rating affirmed at ‘2’
Support Rating Floor affirmed at ‘BBB-‘
Senior unsecured debt affirmed at ‘BBB-‘ 
Subordinated debt affirmed at ‘BB+’ 

GIB:
Long-term IDR affirmed at ‘A’; Stable Outlook
Short-term IDR affirmed at ‘F1’
Viability Rating affirmed at ‘bbb-‘
Support Rating affirmed at ‘1’
Senior unsecured debt affirmed at ‘A’

NBB:
Long-term IDR affirmed at ‘BBB-‘; Stable Outlook
Short-term IDR affirmed at ‘F3’
Viability Rating affirmed at ‘bbb-‘
Support Rating affirmed at ‘2’
Support Rating Floor affirmed at ‘BBB-‘