Fitch places BBK on negative watch.

Byline: [e-mail] (Staff Writer)

Fitch Ratings said it has placed Bahrain-based BBK's individual rating of C/D on Rating Watch Negative (RWN).

Fitch has simultaneously affirmed BBK's long-term Issuer Default Rating (IDR) at A- with a stable outlook, Short-term IDR at F2, support rating at 1 and support rating floor at A-.

The RWN on BBK's individual rating reflects its large recent impairment charges for investment securities (2008: BHD 47 million/ $124.6 million; 2007: BHD 24 million/ $63.6 million) and net movement in cumulative changes in fair value of investments (2008: -BHD 33 million/ $87.5 million; 2007: -BHD 8 million/ $21.2 million) in equity, and Fitch's concern that the bank's performance in 2009 may also be negatively impacted by losses from investment securities.

While the bank has fully provided for its exposure to SIVs (BHD 57 million/ $151 million) and Lehman Brothers, the bank has some residual exposure to CDOs in its credit default swaps book, where market conditions continue to be extremely adverse. BBK is exposed to fairly substantial market risks from its portfolio of debt securities as well some equity investments. Further negative pressure on BBK's individual rating arises from its tightened liquidity and substantially increased exposure to property lending in 2008. Fitch said it will resolve the RWN in July following a review of BBK's performance after the first half of 2009.

BBK's individual rating also reflects its significant domestic franchise and adequate asset quality and capitalisation. Fitch added that BBK's IDRs and support rating reflect its view that there is an extremely high probability that the bank would receive support from the Bahraini authorities, if required. This is based on its importance to the local banking system and its 32 per cent indirect ownership by the Bahraini government. Downside risk to the IDRs is negligible as the long-term IDR is at the support rating floor.

Operating profits fell 21 per cent year on year (yoy) in the first nine months of 2008 after a 29 per cent decline in 2007, mainly due to impairment charges for investments. Pre-impairment operating profits were adequate in the first nine months of 2008 at BHD 51 million ($135.2 million), driven by rapid loan growth with adequate margins, improved cost control and low loan impairments although Fitch said that the latter are likely to rise as the loan book seasons following rapid growth.

Asset quality in the loan book is adequate, with impaired loans at 3.6 per cent of gross loans at end of the first nine months of 2008 and reserves coverage of 80 per cent. Fitch said it would be concerned if BBK's exposure to real estate lending (23 per cent of end-9M08 loans) and construction lending (10 per cent) were to increase from the current high levels. Credit risk arises from credit default swaps, written on GCC and Indian banks and corporates and certain tranches of CDOs, with a total notional equivalent to 96 per cent of equity at the end of the first nine months of 2008.

Fitch considers BBK's liquidity to be tight as its reliance on wholesale funding has increased in the worsening market conditions, and competition for local customer deposits has meant that loans grew faster than customer deposits, resulting in deteriorating loan/deposit ratios. Funding is mainly from customer deposits but the funding profile is strengthened by some long-term borrowing. BBK's capitalisation was adequate in 2008 following a Q407 BHD 50 million ($132.6 million) rights issue. The Fitch eligible capital ratio was at 14.4 per cent at the end of the first nine months of 2008.

Established in 1971, BBK offers retail and commercial banking through 16 domestic branches and presences in Kuwait, Dubai and India. BBK's largest shareholder is the government of Bahrain with 32 per cent, Ithmaar Bank with 25 per cent, a Bahraini investment bank. The latter also wholly owns a Bahraini Islamic bank, Shamil Bank. In the last quarter of 2008, BBK received a proposal from Ithmaar Bank to acquire Shamil Bank through a share swap.

2009 CPI Financial. All rights reserved.

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