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Mergers loom over Bahrain’s banking system

5 November 2025

 

The memorandum of understanding signed between National Bank of Bahrain (NBB) and Bank of Bahrain and Kuwait (BBK) on 2 November, advancing talks towards a formal merger, provides a welcome boost to a banking sector that has felt the headwinds of Bahrain’s challenging economic situation.

Building scale is a key ambition for Bahraini banks, and recent merger activity has helped local lenders find synergies, sometimes through acquisition from non-Bahraini peers. 

The Kuwait Finance House (KFH) acquisition of Ahli United Bank (AUB) in October 2022 helped forge one of the Gulf’s largest players. The local Al-Salam Bank completed the acquisition of the consumer banking business of Ithmaar Bank that year, building one of the island’s largest sharia-compliant lenders.

More recently, HSBC Bank’s Bahrain branch has transferred its retail banking business to BBK, an example of a domestic player taking assets off a foreign institution. Kuwait’s Burgan Bank, meanwhile, completed in Q1 2025 the acquisition of Bahrain’s United Gulf Bank (UGB) for $190m.    

NBB and BBK would make for a robust marriage of two large conventional Bahraini lenders. The former saw its assets grow 8% year-on-year to BD5.97bn ($15.8bn) in H1 2025, while BBK’s assets as of the end of September 2025 stood at BD4.6bn ($12.2bn), up 9.6% on the same period last year. 

This looming combination would have heft in a banking system marked by a large number of institutions (83 in total in September).

A joint statement from the two banks said that should the merger proceed, it “has the potential to create a stronger, more dynamic and forward-looking entity with enhanced scale, agility, and capabilities”.

Market adjustment

The likely outcome of a stronger bank with a higher market share is a positive for Bahrain. And yet, given the banks’ continued exposure to a sovereign with weak finances and an overreliance on oil revenues, the simple fact of merging does not override existing challenges. 

Although Manama boasts some of the Gulf’s longest-established banking institutions, these are still subject to a rating environment reflective of a country with a debt-to-GDP ratio forecast to rise to 136% in 2026, according to Fitch Ratings. The fiscal deficit is expected to remain around 9% of GDP through 2026, driven by high interest costs and reliance on oil revenue.

This has real-world impacts on the banking system. In April 2025, Fitch revised Bahrain’s outlook to negative, noting that while it benefits from strong financial support from GCC partners, the ratings agency identified low foreign reserves and high external debt as posing significant risks.  

By way of illustration, NBB’s main exposure is to the Bahraini sovereign (at BD1.8bn – $4.8bn – or 3.3x common equity Tier 1 (CET1) capital, at end-2024), mostly in the form of debt securities, but also in lending to the government and Treasury bills. NBB is also exposed to the sovereign through lending to quasi-government entities, notes Fitch.

Fitch-rated Bahraini banks are constrained by the sovereign rating of ‘B+’ or capped by Bahrain’s country ceiling. “Despite this, these banks’ standalone financial profiles and metrics in particular compare well with some higher-rated GCC peers,” says Amin Sakhri, director, Financial Institutions for Fitch Ratings.

“We see a lot of common features in relation to the operating environment to the rest of the GCC,” says Sakhri. “Bahrain is highly dependent on government spending, and highly dependent on oil prices. But the difference is that, in the case of Bahrain, the sovereign rating is lower, which leads to a less dynamic operating environment – particularly in terms of the ability of the sovereign to stimulate the economy relative to other GCC banking sectors.”

Sustained asset strength

Although this has a detrimental effect on the operating environment relative to other countries, Bahraini banks have sufficient armoury to protect themselves from sovereign-linked fiscal challenges.

“Looking at the metrics, capital buffers have remained fairly sound in 2025 and the performance has also been stable relative to 2024, so there’s nothing to cause concern. One of the key strengths of the banking sector remains capitalisation levels,” says Sakhri.

According to the analyst, banks such as NBB and BBK are showing strong capital buffers, comparing favourably with GCC peers, and asset quality metrics are not necessarily weaker than at banks in the banking sectors of Qatar (BB operating environment), the UAE (BBB+) or Saudi Arabia (BBB+).

Another source of comfort is that two out of the five Fitch-rated Bahraini banks are very little exposed to the domestic operating environment and their ratings are not constrained by Bahrain’s sovereign rating. 

The financial sector remains a prop of the Bahraini economy. Central Bank of Bahrain governor Khalid Humaidan told a meeting of regional bank governors in mid-October that financial services was the largest sectoral contributor to the national economy, accounting for 17% of GDP.

Humaidan also noted that digital advancements are helping to enhance credit access and support small businesses.

“Projects are being deployed by the Bahraini government, albeit at a more modest level than in other places in the GCC, given the sovereign’s weaker financial flexibility,” says Sakhri.

While credit growth is well below the high rates seen in some neighbouring economies, analysts see room for a respectable performance.

“A lending growth of about 5%-6% next year for the sector can be expected, despite the weaker operating environment score relative to other GCC countries,” says Sakhri. 

One new lending opportunity may come through a government plan to boost housing. The  Ministry of Housing & Urban Planning launched a new financing option, Tasheel+, earlier this year, in collaboration with local banks. Lenders will provide financing, while the ministry will cover government support payments directly to the banks.

The CBB is also looking to burnish its reputation as a leading regulator, having established the region’s first fintech sandbox as far back as mid-2017. It has recently developed a new framework for stablecoins. More recently, the CBB announced the launch of an SME Fund, after a strategic agreement between Bahrain Development Bank, NBB, BBK and Al-Salam Bank.

These initiatives, combined with recent M&A moves, should give added impetus to a banking sector that is looking to exert a more dynamic impact on the local and regional economy.

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James Gavin

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