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 good capital adequacy ratio and comfortable liquidity.
The FSR remains constrained by a high ratio of impaired financings, asset concentration risks, weak profitability and sovereign risk exposure to Pakistan (through its Pakistan subsidiary). In view of AIB's strong ownership, the Long and Short-Term Foreign Currency Ratings (FCR) are maintained at 'BB+' and 'A3', respectively.
Accordingly, the Support Level is affirmed at '2'. The likelihood of official support from the Bahraini authorities in case of need is assessed as very high.
In view of the moderate improvement in asset quality and profitability in the first quarter of the current year, coupled with management's expectation of a further decline in NPFs and a sustained profit recovery in full-year 2013, the 'Stable' Outlook for the ratings is maintained. However, CI notes that in the event the anticipated improvements in profitability and asset quality do not materialize, and if sovereign risk exposure to Pakistan rises further, it is more than likely that the ratings will be adjusted downwards in the next review.
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. Although the Bank's non-performing financings (NPFs) grew moderately in 2012, they declined in the first quarter of the current year and are projected by management to continue falling throughout the remainder of 2013 due to disposals and recoveries.
That said, credit risk remains elevated, especially in Pakistan, and a rise in NPFs is a possibility. 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 Capital Intelligence (CI)'s view that stronger loss-reserve coverage for NPFs would provide a buffer given heightened credit risk in Pakistan. This is particularly so since the Bank's capacity to build provisions is severely constrained by very weak operating profitability.
Although the Bank's unprovided NPFs constituted a rather significant proportion of free capital, the 'effective coverage ratio' (i.e., the total of a bank's free capital and loan-loss reserves in relation to its NPFs) calculated by CI was assessed as being more comfortable.
The Bank recorded a net loss in 2012 due to larger provision charges in Bahrain and Pakistan. Moreover, operating profitability remained very weak due to the effect of a large cost base compounded by modest gross income generation.
Operating profit recovered somewhat in Q1 2013, although it remained very low measured to average total assets (annualized). Management expect a sustained improvement in operating profit throughout the remainder of 2013 on the back of a significant reduction in the cost of funds. AIB's liquidity position continued to be comfortable.
However, a considerable part of that liquidity, primarily generated locally from customer deposits, is invested in Pakistan government Sukuk (Pakistan contributed to more than one-half of total assets at end-2012).
Customer deposits (largely Unrestricted Investment Accounts) are the principal source of funding and are well diversified. Despite the decline in the capital base due to net loss, and the consequent negative internal capital generation, the balance sheet is still well capitalised. However, unless the Bank is able to reverse the negative trends in profitability, it is more than likely that the capital base will come under pressure in the coming years.
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 89 commercial banking branches, situated in the major cities.
In Bahrain, banking operations are conducted from the head office and 6 branches. Total assets at end 2012 were Dhs1,418m and total capital was Dhs169m.
(Ameinfo.Com / 21 June 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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