Dec 23 2014
(The following statement was released by the rating agency)
LONDON, December 23 (Fitch) Fitch Ratings has affirmed National Bank of
Bahrain’s (NBB) and BBK B.S.C.’s (BBK) Long-term Issuer Default Ratings (IDRs)
at ‘BBB’ and has revised the Outlooks to Negative from Stable. Fitch has also
affirmed Ahli United Bank B.S.C.’s (AUB) IDR at ‘BBB+’. The Outlook is Stable.
At the same time, Fitch has affirmed NBB’s Viability Rating (VR). A full list of
rating actions is at the end of this rating action commentary.
The rating actions follow Fitch’s revision of the Outlook on the Bahraini
sovereign rating to Negative from Stable (see ‘Fitch Revises Bahrain’s Outlook
to Negative; Affirms at ‘BBB” dated 19 Dec 2014 on ). NBB’s
IDR is driven by its VR, and the revision of the Outlook reflects increased
pressure on NBB’s VR from the weakened operating environment. At the same time,
Bahrain’s ability to support NBB may also weaken, as indicated by the Negative
Outlook on the sovereign rating. BBK’s IDR is support-driven and the revision of
its Outlook reflects pressure on Bahrain’s ability to support its domestic
banks.
KEY RATING DRIVERS – IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING
FLOORS
BBK’s and AUB’s IDRs are support-driven.
BBK’s IDR, Senior Debt Rating, Support Rating (SR) and Support Rating Floor
(SRF) are driven by support from the Bahraini sovereign. Fitch’s view of support
for BBK is based on its systemic importance as a major retail and corporate bank
in Bahrain, and the Bahraini authorities’ high propensity to support domestic
commercial banks.
AUB’s IDR, Senior Debt Rating and SR 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 a 17.8%
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% stake). AUB’s IDRs have been maintained on
Stable Outlook as Fitch considers neither PIfSS’ ability nor its propensity to
support AUB has changed following the revision of the Outlook on the sovereign
rating.
NBB’s Long-term IDR is driven by its VR. In the case of NBB, the SR and SRF
reflect Fitch’s expectation of a high probability of sovereign support from the
Bahraini authorities, if required. This view is based on NBB’s leading domestic
franchise; we also feel the significant Bahraini government ownership (of 45%)
could provide some additional incentive to support the bank.
RATING SENSITIVITIES – IDRs, SENIOR DEBT, SUPPORT RATINGS AND SRFs
BBK’s IDR, Senior Debt Rating, SR and SRF 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.
However, an upgrade of Bahrain’s rating would not necessarily lead to an upgrade
of BBK’s ratings.
NBB’s IDR is driven by its VR. Given NBB’s domestic focus, Bahrain’s sovereign
rating would likely constrain NBB’s VR; hence the current Negative Outlook. A
change in the Bahraini authorities’ ability to provide support would also affect
the SRF.
AUB’s IDR and SR are sensitive to a change in Fitch’s view of PIfSS’s ability or
propensity to provide support and also to changes in Bahrain’s Country Ceiling.
The IDRs would be downgraded if Fitch believes that PIfSS’s ability or
willingness to support has diminished, including as a result of a significant
increase in country risk. An upward revision of Bahrain’s Country Ceiling,
although unlikely at present, would lead to an upgrade of AUB’s Long-term IDR by
one notch.
KEY RATING DRIVERS – VRs
The economic environment in Bahrain is gradually recovering from the financial
crisis and Bahrain’s own issues arising from Arab Spring type unrest in 2011.
The outlook for Bahrain and the wider GCC region is generally benign, which
should be supportive of growth in Bahrain. Large infrastructure projects
(including those financed by other GCC states) are likely to emerge as a key
driver of economic activity and of increased lending opportunities for domestic
banks in the years ahead. However, Bahrain is among the most vulnerable in the
GCC to the fall in oil prices, which has exacerbated the country’s already
challenging fiscal situation. Fitch estimates Bahrain’s fiscal breakeven oil
price to be around USD130/bl, compared with a forecast for Brent to average
USD83/bl in 2015. Fiscal flexibility is constrained by the very low share of
non-oil revenue of just 14% of total revenues.
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. The domestic retail banks (BBK and NBB) have a significant presence
in the domestic market, and so are 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% of AUB’s profit.
Given its current level, BBK’s VR is unaffected by the sovereign rating action.
The VR reflects BBK’s satisfactory and fairly resilient financial performance,
despite the uncertain operating environment in Bahrain. Its well-established
franchise and satisfactory funding and liquidity indicators, in addition to
improving asset quality and capitalisation are also important rating drivers.
The VR also considers the bank’s concentrated loan book and its dependence on
the undiversified Bahraini market.
Because of the bank’s fairly limited exposure to the Bahraini operating
environment, AUB’s VR is also unaffected by the sovereign rating action. The 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 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 capital ratios that although adequate,
are low compared with domestic and regional peers.
NBB’s VR reflects the bank’s strong capital ratios which we expect to remain a
strength despite some expected weakening in the event of future asset growth.
The rating also reflects the bank’s leading domestic franchise, consistent and
strong profitability, generally healthy asset quality despite a high headline
impaired loan ratio, and sound liquidity. They also consider NBB’s reliance on a
small and competitive domestic environment and high concentrations in both loans
and deposits.
RATING SENSITIVITIES – VRs
AUB’s VR is sensitive to asset quality or liquidity deteriorations or if its
Fitch Core Capital (FCC) ratio is severely eroded. A downgrade of the Bahraini
sovereign would not necessarily result in a downgrade of AUB’s VR; given the
extent of the bank’s business outside Bahrain. 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.
Downside risk to BBK’s VR could arise if the socio-political or economic climate
in Bahrain materially deteriorates or if asset quality or capitalisation
considerably weakens from current levels. However, a downgrade of the Bahraini
sovereign would not necessarily impact BBK’s VR.
Upside potential for NBB’s VR is somewhat limited at present because of the
uncertain operating environment in Bahrain, while downside risk might arise from
further deterioration in NBB’s asset quality, or a worsening of the Bahraini
economy. At its current level, NBB’s VR is particularly sensitive to the
Bahraini operating environment: a downgrade of the Bahraini sovereign would very
likely impact NBB’s VR and hence the Negative Outlook on its IDR matches that of
the sovereign. A significant reduction in capital would also be ratings
negative.
KEY RATING DRIVERS – SUBORDINATED DEBT
The subordinated debt of AUB and BBK are rated one notch below the banks’
respective Long-term IDRs, reflecting Fitch’s view that institutional support
(AUB) 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.
RATING SENSITIVITIES – SUBORDINATED DEBT
The 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 of ‘bbb’ unaffected
Support Rating affirmed at ‘2’
Senior unsecured debt affirmed at ‘BBB+’/’F2’
Subordinated debt affirmed at ‘BBB’
BBK:
Long-term IDR affirmed at ‘BBB’; Outlook revised to Negative
Short-term IDR affirmed at ‘F3’
Viability Rating of ‘bbb-‘ unaffected
Support Rating affirmed at ‘2’
Support Rating Floor affirmed at ‘BBB’
Senior unsecured debt affirmed at ‘BBB’
Subordinated debt affirmed at ‘BBB-‘
NBB:
Long-term IDR affirmed at ‘BBB’; Outlook revised to Negative
Short-term IDR affirmed at ‘F3’
Viability Rating affirmed at ‘bbb’
Support Rating affirmed at ‘2’
Support Rating Floor affirmed at ‘BBB’
Contact:
Primary Analyst
Laila Sadek
Director
+44 20 3530 1308
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst (NBB)
Maria Irusta
Analyst
+44 20 3530 1283
Secondary Analyst (AUB and BBK)
Eric Dupont
Senior Director
+33 1 4429 91 31
Committee Chairperson
Erwin Van Lumich
Managing Director
+34 93 323 8403
Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:
elaine.bailey@fitchratings.com.
Additional information is available on
Applicable criteria, ‘Global Financial Institutions Rating Criteria’ dated 31
January 2014 is available at .
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
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