VOL. XLIV
No. 14
2 APRIL 2001 

BAHRAIN

Bahrain International Bank (BIB) announced on 25 March that its net income had fallen from $30.3mn in 1999 to $313,000 in 2000, due mainly to reduced operating revenues, a rise in operating expenditures and an increase in provisioning costs. In a statement, the bank announced that operating revenues fell to $22.5mn from $48.2mn due to the "continued postponement of several investment realizations due to weak market conditions." The bank also said that general provisions for the year 2000 rose by 75% to $7mn, "reflecting continued prudence with respect to the increase in the investment portfolio."

Speaking about the reduced profits, the bank’s Chairman Faysal al-Marzuq said, "clearly this is a disappointing year following nine years of progressive earnings performance and excellent balance sheet growth." He explained that the bank had been affected by weak market sentiment and liquidity in the US which impaired BIB’s ability to realize certain private equity investments "at sensible values." He noted, however, that the bank "was not directly exposed to the major quoted equity markets" and that its asset base remained healthy and robust. "Our investment securities business performed particularly well against the backdrop of a very weak corporate bond market in the second half of the year." He added that Crown Dilmun, BIB’s wholly owned European subsidiary, performed well from the management and sale of investments in the UK and Germany.

The bank’s CEO, Robin McIlvenny, said that in order to address the reduction in revenue, BIB will aim to reduce dependence on the realization of longer-term illiquid investments in three ways: by achieving greater diversity in its private equity portfolio through the more active sell-down of investments to Middle East clients; increasing the bias towards diversified liquid investments exhibiting more predictable and less volatile returns; developing more client oriented funds to generate greater fee income; and extending income producing investments via the Crown Dilmun subsidiary. This process, he said, was already under way and "early signals in 2001 point to a quick return to the levels of profitability to which our shareholders have been accustomed."

Last month, Bahrain’s BMB Investment Bank announced a net loss of $57mn in 2000 compared to a profit of $31.1mn the previous year. According to a statement from the bank, this was "primarily due to substantial losses incurred in the bank’s trading activities in equities and funds as well as foreign exchange." BMB’s loss from investments totaled $44.8mn in 2000 compared to a profit of $44.7mn the previous year and the bank explained that it equity portfolio was negatively affected by "spiraling oil prices, high US interest rates…together with the anti-trust decision against Microsoft as well as the US election uncertainties at year-end [which] led to deep and sustained declines in equity prices." The bank also experienced an increased loss in foreign exchange trading of $3.7mn, compared to $3.2mn in 1999. Of this loss, $1.6mn was related to externally managed foreign exchange funds but by the end of the year the bank had closed all but one of them.

The bank also explained that net interest income in 2000 fell by 65% to $2.9mn, compared to $8.2mn the previous year, "due to a lower level of interest bearing assets and the higher cost of funding for the bank as a result of increases in US interest rates during 2000." BMB said there was a lower return from structured products due to increases in the cost of funding the liabilities of such structured transactions. The bank’s total assets fell by $35mn, or 5%, during the year to $621mn compared to $656mn the previous year due to "a lower level of trading equities and funds which was partially offset by increases in the private equity portfolio."

However, the bank noted that it did experience a profit of $5.7mn in its capital market activities in 2000, comparing favorably to the $2.7mn loss in 1999. "At the end of 1999, the bank was positioned for lower long-term interest rates. These positions were successfully maintained in 2000, resulting in both income from trading positions as well as the recovery of $10mn of unrealized losses from the 1999 long-term G-7 bond portfolio." BMB also highlights the 8% decrease in operating expenses achieved in 2000 as a result of a reduction in staff costs.

Commenting on the overall situation, BMB’s Chairman Shaikh 'Ali Jarrah al-Sabah said that the bank would aim to continue to "move forward, learn from our mistakes, focus on the positives aspects of the year and stay on the road to our long-term goal of building a premier niche investment bank." CEO Albert I Kittaneh said that "the bank was clearly over-exposed to the risk inherent in trading equities, given the heightened volatility that the markets experienced in 2000," but noted that "BMB’s private portfolio has so far stood up extremely well to the slowing economic growth of 2000." The bank’s capital adequacy ratio at the end of the year stood at 16.1% – higher than the standards set by both the Bahrain Monetary Agency (BMA) and the Basel Committee.

Despite the reasoned explanations for both banks’ less-than-spectacular performances and the common theme of a global downturn in equity markets, potential ratings downgrades can not be ruled out. Darren Stubing, senior analyst at Capital Intelligence ratings agency, told MEES that the two have similar strategies and have enjoyed the good times over the past few years, "but both were hit very hard." BMB’s main problem was its over-exposure to international equity markets and notably technology stocks. "They claim to have taken this on board and to have revisited their risk management systems and policies. We have to wait and see, but they can’t afford another year like the last one – they lost 50% of their equity." Similarly, BIB has watched the value of the stocks and companies that it is holding fall and, as Mr Stubing points out, global equity markets have remained bearish throughout the first quarter of 2001 suggesting further asset devaluation.

But not all Bahrain’s offshore banks were adversely hit in the year 2000. The two giants – Arab Banking Corporation and Gulf International Bank – recording solid profit increases of 13% and 74.7% respectively after somewhat turbulent times in previous years (see MEES, 12 March and 5 March). And, according to the latest statistics from the BMA, the consolidated balance sheet of the offshore banking units rose by 2.8% in the final quarter of 2000 to reach $93bn at end-2000.