The London-based Fitch Ratings agency has downgraded Bahrain International Bank (BIB)'s long-term foreign currency rating to 'BB+' from 'BBB-' (BBB minus). BIB’s short-term foreign currency was lowered to 'B' from 'F3', and Individual to 'C/D' from 'C'. The Support rating remains at '5'. At the same time the long-term outlook has been changed to negative from stable, but will be reviewed by Fitch upon announcement of first half 2002 results.
The rating changes follow the announcement of a substantial loss for 2001, and reflect the agency's concerns over the sustainability of the bank's profitability levels, the need to implement a more diversified strategy and the potential impact upon the bank's wholesale funding base, according to a Fitch Ratings press release.
These negative factors are balanced by a still adequate capital base and an experienced and hitherto successful management team. The negative outlook reflects the agency's concern that resolving the bank's strategic and financial issues may prove challenging over the short/medium term.
BIB was established in 1982 with an original brief to engage in commercial banking. A strategic review in 1991 called for BIB to become a pure investment bank servicing its predominantly high net worth Gulf client base.
The bank focuses on five main activities: investment banking, (the origination of direct investments in the private and quoted corporate sectors in the USA and increasingly in Europe); corporate finance (the provision of M&A advisory services in the Gulf private sector); real estate, (focusing on the development and leasing of UK properties); investment securities (investment in the US corporate and government bond markets), and treasury activities. The bank's investment activities are largely run out of its US, UK and Irish subsidiaries. The treasury and corporate finance activities are based in Bahrain.
BIB reported a loss of $47 million for 2001, which arose from a combination of substantial provisions against its investment portfolios, the implementation of accounting changes relating to controlled investments, and the reversal of a gain recognized in its 2000 figures for an equity sale that did not take place in 2001 as anticipated.
The bank returned to profit ($2.2 million) in the first quarter of 2002 but it remains to be seen whether this is sustainable over 2002 given continued weak conditions in the US private equity and investment securities markets. Record profits reported from 1997 through 1999 were achieved as a result of large investment gains.
However, weak market conditions during the past two years have adversely affected the bank's ability to realize its private equity exit goals, and resulted in significant profit volatility. Management's stated goal of reducing the individual size of direct corporate equity investments, in order to smooth out the bank's future earnings stream and reduce its large exposure risk, has yet to be achieved.
The accounting changes implemented on the advice of BIB's auditors at end-2001 have reinforced the need to reduce the size of individual equity stakes and create a more balanced and diversified investment portfolio and therefore turnover flow.
While this approach will bring some necessary diversification, the pattern of exits is likely to remain vulnerable to disruption in times of market volatility and economic uncertainty. This may also be exacerbated by a loss of control over the timing of exits as greater use is made of investing through external fund managers.
In addition to a radical restructuring of its approach to private equity investments, management's action plan includes a de-gearing of the balance sheet, a reduction in risk-weighted assets—through a controlled sale of investments—a focus on improving liquidity and a reduction in the cost base.
Realistically, some time will be needed to achieve these goals, although the bank has made promising progress in the sale of assets in 2002 with a consequent de-gearing of the balance sheet. Management's ultimate success will, in some part, be contingent on a sustained favorable business and economic environment.
Although BIB continues to be reliant on short-term wholesale funding, it has reduced this reliance during 2002 through its program of controlled asset sales. In the bank's audited 2001 financials, its auditors noted that BIB was not compliant with loan covenants relating to Tangible Net Worth.
BIB has obtained a waiver from its medium-term lenders, but nevertheless Fitch believes that the bank remains vulnerable to a change in sentiment, particularly as a significant proportion of funding falls due for renewal within the next 12 months.
On a more positive note, BIB remains adequately capitalized with a total capital ratio in excess of 25 percent as at end-March 2002. However, in recent years, its capital base relative to the risks it is taking has weakened. Management expects the capital ratio to improve significantly by end-2002 due to a combination of a reduction in risk-weighted assets together with retained earnings for the year and the sale of $18 million (nominal value) of treasury shares.
Asset values in this period have been difficult to predict because of market stress. Although the bank's 'held to maturity' investment portfolio exceeded its market value at end-2001 by $24 million (c.14 percent of end-2001 equity), management estimates that this is more than offset by undervaluations in certain equity stakes.
In common with many other Bahrain-based offshore banks, BIB has no lender of last resort and no dominant shareholder. Given the absence of any obvious source of external support, it is possible that the Bahrain Monetary Authority would provide liquidity support to BIB if it were to run into difficulties in order to maintain confidence in Bahrain's Offshore banking sector. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
