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Bahrain banks have cause for cheer

8 November 2023

Bahrain’s crowded banking sector has seen a sustained improvement in performance over the past year, amid generally stable economic conditions in which higher oil prices and procyclical public spending play a key role.

Loan books are in good shape. According to the Central Bank of Bahrain (CBB), the non-performing loan (NPL) ratio of conventional wholesale banks stood at just 2.1 per cent in the second quarter of 2023, compared to 2.5 per cent in the same period in 2022 – and well down on the 5 per cent seen at the height of the Covid-19 crisis.

Profitability has returned to banks, and higher interest rates – one source of those profits – have not yet had a material impact on loan quality.

Bank metrics have held up quite well, says Amin Sakhri, director – financial institutions, at Fitch Ratings. “There is a broadly stable NPL ratio and deterioration has been contained. We could have expected to see higher rates causing deterioration of asset quality in 2023 but the impact has been limited. We were seeing some deterioration, but it is very well contained.”

In addition, says Sakhri, liquidity in the system remains strong and is supported by higher oil prices. Capital buffers also remain sound and are supported by healthy internal capital generation from profitability overall.

Strong profit growth

The largest banks have seen profits swell this year. Bank of Bahrain & Kuwait showed a 20.9 per cent increase in first-half 2023 profits to BD37m ($98m), on the back of higher net interest income. National Bank of Bahrain showed a smaller 4 per cent increase in net income to BD40.8m ($108m) for the six months to the end of June, driven by higher income from loans and investment securities.

Even so, the overall profitabily of Bahraini banks is low compared to that of competitor countries. The system-weighted average return on assets at 1.2 per cent in 2022 was the lowest in the GCC region, according to the Washington-based IMF, which may reflect intense competition in a market that comprises 75 conventional and Islamic banks.

The shifting global interest rate environment inevitably has a bearing on performances.

According to S&P Global Ratings, a higher-for-longer interest environment means liquidity will be scarcer and more expensive, potentially affecting Bahrain, which has a growing external debt position. The agency points out that Bahrain's retail banks have large and expanding net external liabilities, which at the end of the first quarter of 2023 reached 26 per cent of total domestic lending. Against that, S&P Global Ratings notes that 60 per cent of the foreign liabilities are interbank, and 60 per cent are sourced from the GCC, giving reassurance that external funding will remain stable.

Loan-to-deposit ratios consistently below 80 per cent are another indicator that local deposits and external liabilities are recycled into government and local central bank exposures, said S&P.

Banks that are more corporate-focused benefit more on the asset side because the loans are on floating rates and re-price more quickly upon rate hikes, says Sakhri. “High rates have been supportive, but a bit less so than in markets like Saudi Arabia or the UAE, as these have higher proportions of lower-cost funding.”

Well capitalised

The strong capital positions of Bahraini lenders are a source of strength when it comes to supporting domestic project activity.

“Generally, Bahraini banks are well capitalised. The average Common Equity Tier 1 (CET1) ratio is solid, even in a GCC context, and the loan-to-deposit ratio, as reported by the CBB, is fairly low,” says Sakhri.

This means banks have the ability to absorb a large part of these projects. “We are not really concerned in terms of where banks are going to deploy capital, but it is important to bear in mind that households are under pressure, primarily due to the increase in the cost of living,” Sakhri adds.

Another area where Bahrain has been a regional leader is in financial technology (fintech) and digital banking. According to the World Bank Global Fintech Database, Bahrain was already a leader compared to the region and upper middle-income countries in 2017, with about 80 per cent of the population having made use of digital payments.

Since then, Bahrain has taken significant regulatory steps to create a favourable environment for fintech, including the introduction of a fintech unit at the CBB, a regulatory sandbox and new regulations for the digitalisation of banking and payment services.

As the IMF noted in a September 2023 assessment, digital payment service solutions, such as mobile payment applications, contactless payment cards and e-wallets, have been adopted by the public.   

Meanwhile, the door is still open for consolidation in a crowded banking system. The majority of these lenders are small, but just three of the country’s banks have a 50 per cent share of total assets.

The merger of Ahli United Bank and with Kuwait Finance House in 2022 was a cross-border deal, but the traditional drivers for domestic consolidation – which in the Gulf tend to be state equity owners looking to rationalise their shareholdings – are largely absent in Bahrain.

“Bahraini banks are generally profitable and their financial profiles are healthy, so there is no immediate need for mergers,” says Sakhri.

That will leave the country with perhaps more banks than it strictly needs, a legacy of its former position as the Gulf’s main financial centre.

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James Gavin

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    After initial concerns that the market would experience a sharp downturn and project cancellations following the onset of conflict in the region, regional president McGrail says WSP has yet to see a single major contract cancelled across its regional portfolio.

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    “None of the projects we are currently involved in have been put on hold or suspended,” he says. “It is more re-evaluation. Some of that is investor sentiment, but some of it is materials and logistics as well, which people do not necessarily consider.”

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    “Requests for proposals have not slowed down across any of our disciplines or business units,” he says. “We are definitely seeing an uptick in infrastructure.”

    Infrastructure pivot

    That focus points to where McGrail expects the next few years of growth to come from. Rail sits at the centre of the UAE story, alongside road upgrades and other major developments in Abu Dhabi. In Dubai, the clearest signal of intent is the expansion of Al-Maktoum International airport.

    “Al-Maktoum is a really good indicator of the future direction of travel,” he says. “That is not a project that is slowing down. There has been a commitment to Emirates that it will move there, and it is still progressing.”

    The scale of the airport – and the challenge of relocating an airline the size of Emirates in one move – raises the question of how it will be funded. Here, McGrail returns to the theme of stability and to the mechanism that underpins it.

    “One of the beauties of this region is the ability of government to step in,” he says. “They can fund it. If the private sector does start to suffer, that is the backstop. They push money into infrastructure – roads, rail, airports – which keeps our industry moving.”

    Saudi reset

    In Saudi Arabia, the recalibration story predates the conflict, and McGrail says the change should be read as a strength rather than a retreat.

    “I am positive,” he says. “When the reprioritisation started at the beginning of 2025, having lived through the global financial crisis here, I saw the decision to stop, re-evaluate and reprioritise expenditure as a positive. When Vision 2030 was set, Saudi Arabia had not won Expo or the World Cup, so the reprioritisation was the right thing to do. Saudi Arabia will come out of it stronger. Short-term pain, long-term gain.”

    The nature of the work is shifting with the budget. McGrail sees the kingdom moving towards a model long familiar in the UAE, in which core infrastructure and a handful of landmark buildings are delivered first, before surrounding plots are carved up and sold on.

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    That approach is increasingly tied to public-private partnerships (PPPs), although McGrail is measured on how far the model will stretch.

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    The $3bn Taweelah C combined-cycle gas turbine (CCGT) project has been the UAE power sector’s standout contract award this year, accounting for the majority of the $4.17bn in awards as of early September.

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    > ECONOMY: Conflict bolsters case for Saudi economic diversification
    > BANKING: Saudi lenders readjust to lower lending and deposit climate
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    > DOWNSTREAM: Sabic steps up Saudi petchems investment
    > POWER: Saudi Arabia’s power award activity slows
    > WATER: Saudi water sector hits sharp slowdown
    > CONSTRUCTION: Saudi construction defies the headwinds
    > TRANSPORT: Saudi infrastructure pushes forward amid conflict
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    The US Department of State has initiated market research to procure a design-and-build contract for the US Pavilion at Expo 2030 Riyadh.

    According to procurement documents released through the US federal contracting portal, the project covers the full design, construction, exhibition fit-out, maintenance, and eventual decommissioning and removal of the national pavilion.

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    MEED’s October 2026 report on Saudi Arabia includes:

    > COMMENT: Saudi projects hold steady
    > GOVERNMENT: Riyadh looks to reset its regional defence outlook
    > ECONOMY: Conflict bolsters case for Saudi economic diversification
    > BANKING: Saudi lenders readjust to lower lending and deposit climate
    > UPSTREAM: Aramco upstream spending gathers pace
    > DOWNSTREAM: Sabic steps up Saudi petchems investment
    > POWER: Saudi Arabia’s power award activity slows
    > WATER: Saudi water sector hits sharp slowdown
    > CONSTRUCTION: Saudi construction defies the headwinds
    > TRANSPORT: Saudi infrastructure pushes forward amid conflict
    > DATABANK: Saudi data indicates project spending shift

    To see previous issues of MEED Business Review, please click here
    https://image.digitalinsightresearch.in/uploads/NewsArticle/20580855/main.jpeg
    Yasir Iqbal