Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Bahrain-based AlBaraka Islamic Bank (AIB)’s Financial Strength Rating (FSR) at ‘BB’, supported by its strong ownership, high liquidity and sound customer deposit funding, and moderately improved asset quality. The FSR remains constrained by risk exposure to low rated Pakistan (through the subsidiary ‘AlBaraka Bank Pakistan’), sector concentration risks and small balance sheet, and ongoing very low profitability. Also constraining the FSR is the decline in the capital adequacy ratio (CAR). The Support Level is affirmed at ‘2’ on the basis of the very high likelihood of support from the parent, as well as from the Bahraini authorities in case of need. Accordingly, AIB’s Long and Short-Term Foreign Currency Ratings are maintained at ‘BB+’ and ‘A3’, respectively. The Outlook for all the ratings is ‘Stable’. CI notes that in the event the Bank’s capital adequacy continues to decline significantly and/or asset quality deteriorates materially, this may exert downward pressure on the ratings.
AIB is a member of the Bahraini Public Shareholding Company ‘AlBaraka Banking Group’ (ABG), which operates Islamic banking subsidiaries in the MENA region and further afield. AIB is still a small bank by all measures in Bahrain, but claims a rather significant market share of Islamic banking assets in Pakistan. Following settlements and write-offs in 2013 asset quality improved moderately as evidenced by the decline in non-performing financings (NPFs) and increase in loss-reserve coverage. The proportion of unprovided NPFs to free capital also reduced, though it remains relatively high. Expected recoveries in the current year should contribute toward a further reduction in NPFs. That said, credit risk – especially in Pakistan – remains elevated and this may translate into new NPFs. AIB’s financing-loss reserves are established in accordance with the regulatory requirements in Bahrain and Pakistan. Notwithstanding the secured nature of most of the facilities, it is CI’s view that stronger loss-reserve coverage for NPFs would provide a buffer against heightened credit risk in Pakistan. This is particularly so since the Bank’s capacity to build provisions is severely constrained by very low operating profitability.
Although operating and net profit staged a moderate recovery in 2013, having recorded net loss a year earlier, AIB’s profitability measured to average total assets at both the operating and net levels remained very low. Net profit returned to positive territory in 2013 lifted by a larger gain on sale of investments, an improved funding cost and a substantial fall in provision charges. The very low profitability is largely a function of the Bank’s rather large cost base, combined with ongoing limited gross income generation. AIB’s meager operating profitability considerably restricts its risk absorption capacity. Although management expect an improvement in operating profit throughout the remainder of 2014, it is expected to remain comparatively low.
The liquidity position continued to be strong, with a considerable amount of that liquidity, primarily generated locally from customer deposits, invested in Pakistan government Sukuk (Pakistan contributed to one-half of total assets at end 2013). The Bank’s cautious financing policy over the last four years has led to a rise in liquid asset holdings. Customer deposits (largely Unrestricted Investment Accounts) are the principal source of funding and are well diversified. Despite the decline in total capital due to foreign currency translation loss and the fall in the CAR, the balance sheet was adequately capitalised. However, unless the Bank is able to improve profitability metrics significantly, it is more than likely that capital adequacy will come under pressure in the coming years at current rates of financing growth. The planned local currency Tier 2 Sukuk in Pakistan over the near term should lift capital adequacy to a higher level.
Incorporated in Bahrain in 1984, AIB operates as a retail bank under a licence granted by the Central Bank of Bahrain (CBB). AIB is a 91.1% owned subsidiary of ABG, which is majority owned by Shaikh Saleh Abdulla Kamel in Saudi Arabia and Dallah Al Baraka Holding Company (E.C.). The latter is a subsidiary of the Jeddah-based conglomerate Dallah Al-Baraka Group. The principal activities of AIB include the provision of demand and investment accounts and finance and investment on the basis of Murabaha, Mudaraba, Musharaka and Ijara. Through its subsidiary in Pakistan the Bank operates 110 branches, situated in the major cities. In Bahrain, banking operations are conducted from the head office and 6 branches. Total assets at end 2013 were USD1,631mn and total capital was USD165mn.
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