Fitch downgrades Bahrain Int'l Bank

Fitch Ratings, the international rating agency, downgraded Bahrain International Bank’s ratings as follows: Long-term foreign currency rating to ‘BB+’ from ‘BBB–’ (BBB minus), Short-term foreign currency to ‘B’ from ‘F3’, and Individual to ‘C/D’ from ‘C’.

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By  Massoud Derhally Published  May 28, 2002

Fitch Ratings, the international rating agency, downgraded Bahrain International Bank’s ratings as follows: Long-term foreign currency rating to ‘BB+’ from ‘BBB–’ (BBB minus), Short-term foreign currency 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.

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 reported a loss of USD47 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 recognised in its 2000 figures for an equity sale that did not take place in 2001 as anticipated.

The bank returned to profit (USD2.2m) 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 realise its private equity exit goals, and resulted in significant profit volatility.

On a more positive note, BIB remains adequately capitalised with a total capital ratio in excess of 25% 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 USD18m (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 USD24m (c.14% of end-2001 equity), management estimates that this is more than offset by undervaluations in certain equity stakes.

Bahrain International Bank (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, corporate finance, real estate, investment securities and treasury activities.

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