A woman sitting in a branch of NBB, pointing to a leaflet.

On the rise: National Bank of Bahrain saw fee income expand by 25% in the second quarter of 2022

Having benefited from high government spending during the pandemic, Bahrain’s banks are looking to the retail sector to support growth in the coming year, writes James King.

As Bahrain’s economy has rebounded from its Covid-19 pandemic lows, the country’s banks have prospered. Higher oil prices and more supportive government spending helped to stimulate a recovery in non-oil activity in 2022, while improving consumer confidence boosted retail activity across the board.

Such trends have lifted the performance of Bahrain’s lenders over the past 12 months and restored their profitability metrics to levels last seen before the onset of the global pandemic. The return on equity of the country’s banking sector hit 4.6% in June 2022, tracking the 4.8% recorded in the same period in 2019, after slumping to 1.5% in June 2020, according to data from the Central Bank of Bahrain (CBB).

This encouraging performance is also mirrored in other key indicators, including system-wide asset and deposit growth, with the consolidated balance sheet of the country’s banks hitting $222bn in November 2022, up from 4.7% on the previous year, according to figures supplied by the Bahrain Association of Banks (BAB). Notably, this growth was achieved as capitalisation levels remained high and as many of the country’s lenders maintained a prudent stance in terms of their provisioning levels. The system-wide Tier 1 capital ratio stood at 17.7% in the CBB’s September 2022 financial stability report, while specific provisions were at 69.9%.

“All factors point to the banking sector in Bahrain continuing to achieve strong performance rates comparable to, or greater than, those reported in 2021. This is mostly tied to the overall expansion of the Bahraini economy, since the Ministry of Finance recently declared a 4.2% year-on-year increase in gross domestic product in the kingdom during the third quarter of 2022,” says Waheed Al Qassim, CEO of the BAB.

Above all, the supportive operating environment has ensured that Bahrain’s leading banks have registered strong fee income growth, with the likes of the Bank of Bahrain and Kuwait and the National Bank of Bahrain seeing their fee income expand by 23% and 25%, respectively, in the second quarter of 2022, according to research from SICO, a wholesale bank in Bahrain.

Stronger net interest margins (NIMs) also helped to lift profits across the sector. Research from Kamco, a regional investment bank, indicates Bahrain banks’ NIMs increased from 2.43% in 2021 to 2.59% in the second half of 2022, despite elevated competition tempering the full upside of this increase. A shifting monetary policy landscape, with the CBB tracking the US Federal Reserve’s interest rate hikes, has also supported sector-wide NIMs.

“If we look at the quarterly performances of the conventional banks, there was a recovery of their return on equity, which moved back to high single digits and that tracks pre-Covid levels quite closely,” says Sumaya Al Jazeeri, assistant vice-president of financial institutions at SICO. “We have seen this recovery in core income growth, including fee income and net interest income growth. Obviously, higher interest rates have allowed banks to widen their NIMs.”

Consumer strength

Taken together, Bahrain’s lenders are ready to face the challenges and opportunities presented by the coming year. Although economic growth is expected to cool in 2023, the country’s lenders could still benefit from healthy retail banking income, as consumer activity pushes ahead of corporate lending. Moreover, a dynamic mortgage market is also helping banks to capitalise on the growing demand for new homes in Bahrain.

“I think the main stimulus will be coming from the retail segment and a key part of that will be mortgage lending. There is huge demand for housing and the government has created housing schemes to increase the volumes of available housing for people,” says Ms Al Jazeeri.

In particular, the Mazaya scheme, a social housing finance initiative between the government of Bahrain and the country’s leading banks, is expected to spur further demand for mortgage facilities. Under the Mazaya framework, the maximum interest rate cap is 6.1%, meaning that even in an environment of rising interest rates, demand is likely to remain healthy. To participate, Bahraini citizens must be aged between 20 and 35 years, and have a salary range of between BD600 ($1592) and BD1200 per month.

Research from SICO indicates that existing beneficiaries of the Mazaya scheme constitute approximately 3% of the eligible population, meaning there is significant scope for growth in this area. Moreover, Bahrain is anticipated to see relatively strong population growth among its nationals over the short-to-medium term, with the total population expected to increase from 1.6 million in 2020 to 2.1 million in 2030, according to the Bahrain Ministry of Information. The outperformance of mortgages in the personal lending market can be seen in the 2022 figures; in the first six months of the year, mortgage lending surged by 19%, according to SICO.

Retail opportunities

Nevertheless, as consumer spending returns to pre-pandemic norms, fee growth from the use of credit cards, for instance, is likely to also boost most banks’ retail business lines. As the corporate sector is due for a quieter year in light of predictions of lower oil prices, this surge in retail activity is likely to account for the lion’s share of the banking system’s growth over 2023.

“We’re expecting 3% to 4% loan growth this year, which will mainly be driven by the retail segment. Corporate lending will be a bit more muted as a result of relatively lower government spending,” says Redmond Ramsdale, head of Middle East bank ratings and Islamic banking at Fitch Ratings.

As this development trajectory unfolds over 2023, Bahrain’s lenders are unlikely to face any deterioration in their asset quality. Indeed, over the past few years, most of the country’s largest lenders have seen their ratio of non-performing loans (NPLs) decline, with the likes of Al Salam Bank, National Bank of Bahrain and Bank ABC all registering declines in their NPL positions between 2020 and 2022. This trend is reflected across the sector, with NPLs falling from 5.5% in the first quarter of 2018 to 3.3% by June 2022, according to the CBB.

“We think NPLs are going to stay around 3.2% to 3.3% over 2023,” says Mr Ramsdale. “Overall, we believe that financial metrics for the banking system will remain stable.”

Digital trailblazers

As Bahrain’s banks look to the future, their efforts to digitally transform their products and services, as well as their back-end operations, are gathering place. Although the Covid-19 pandemic has accelerated this trend, the country’s lenders were already well ahead of most regional peers before the onset of the health crisis. As a result, Bahrain’s banks are at the vanguard of the digital banking revolution unfolding across the wider region.

The launch of Ila, Bank ABC’s digital mobile-only bank, in November 2019 is a case in point. Through Ila, customers can create an account in minutes and receive a virtual card instantly.

“We at Bank ABC are committed to driving innovation and digital transformation across the region,” says Sael Al Waary, acting group CEO at Bank ABC. “This is well illustrated by a number of market-first initiatives including Ila, which has revolutionised retail banking in Bahrain and has recently begun its regional expansion, starting with Jordan.”

The lender’s digital innovations are also advancing in the context of its transaction banking business.

“The digital transformation of our transaction banking business is also geared towards building a stronger platform to substantially increase our trade volumes, and it’s not just transforming the business within Bank ABC, but driving a larger transformational impact on the industry in the region,” says Mr Al Waary.

Taken together, these initiatives underscore Bank ABC’s wider digital banking ambitions.

“As we build our ‘bank of the future’, we remain focused on delivering an increasingly intuitive, digital-first banking experience for corporates and individuals, that will cater for our customers’ evolving needs,” says Mr Al Waary.

In common with other markets in the region, and further afield, Bahrain’s banks’ digital transformation efforts have been accelerated by changes stemming from the pandemic. As consumers and businesses have increasingly adopted a digital-first approach to their banking needs, most lenders have responded to this behavioural adjustment by unveiling new solutions that are tailored to new forms of engagement.

“The rise of digital technologies has brought significant changes to the banking industry, particularly in the area of retail banking. The impact of the Covid-19 pandemic has further accelerated this trend, with customers seeking more convenient and accessible banking services,” says Samih Abutaleb, group head of information technology and chief technology officer at Ahli United Bank (AUB).

“To respond to these changing demands, AUB Group has made a significant investment in modernising its infrastructure and adopting cutting-edge technology,” says Mr Abutaleb. “The bank has implemented advanced artificial intelligence and chatbot technology to enhance the customer experience, providing round-the-clock support and instant resolution to customer queries.”

Indeed, the culture of innovation that exists across Bahrain’s financial services sector is pervasive. The launch of the Bahrain FinTech Bay in 2018 is a case in point. Despite Bahrain’s small size — it has a population of just 1.5 million — it now boasts one of the Middle East and north Africa region’s largest fintech hubs, and one that is comparable to centres in the UAE and Saudi Arabia. For the country’s banks, the strength of its domestic fintech scene provides both advantages and an additional competitive edge.

“Our goal is to strike a balance between partnering with innovative fintechs and competing with them, in order to deliver the best possible outcomes for our clients,” says Mr Abutaleb.

“On the one hand, AUB recognises the importance of partnering with fintechs in order to tap into their cutting-edge technology, expertise and innovation. For example, we have established a partnership with Bahrain FinTech Bay and have launched our own I-Innovate group-wide programme, which sources practical ideas from within the bank and from external partners.”

Bahraini banks are working to promote the adoption of digital and open banking applications

Waheed Al Qassim

But Mr Abutaleb also notes that competing with fintech groups is an important aspect of the bank’s relationship with the sector. And this requires continuous innovation, as well as the modernisation of AUB’s technology infrastructure. This creative tension between competition and complementarity, with respect to Bahrain’s banks and its fintech sector, is being nourished by the development of one of the region’s first open banking regulations.

In 2020, the central bank launched phase one of its Open Banking Framework, based on global ISO standards. The second phase of this regime was unveiled in 2021, with the CBB ultimately aiming for a system of open finance in the near future. “Bahraini banks are working to promote the adoption of digital and open banking applications to meet the growing requirements and expectations of customers,” says Mr Al Qassim.

Time to consolidate

Meanwhile, Bahrain’s wider banking sector is under pressure to consolidate. With 30 retail banks and 56 wholesale banks making up the system as a whole, the market imperative to slim down the number of operators is not new. But in recent times, some progress has taken place. This includes the National Bank of Bahrain’s acquisition of Bahrain Islamic Bank in 2020, as well as the sale of Citi’s consumer banking business in the country to AUB.

In November 2022, Islamic lender Al Salam Bank completed the acquisition of Ithmaar Bank’s consumer banking business. The deal consolidated Al Salam Bank’s position as the country’s largest sharia-compliant lender, underscoring the growth trajectory of Islamic finance in Bahrain.

Despite these recent developments, however, further progress on consolidation to sizeably reduce the number of lenders in the country will be unlikely. This is largely due to a lack of common shareholders that would ease the facilitation of these transactions.

“The biggest barrier against consolidation is a lack of common shareholders. And that’s quite an important element of any deal. If you look at a lot of the big mergers that we’ve seen in the region, over the last five years it’s always been where there’s common shareholders and where it creates that shareholder value,” says Mr Ramsdale.

Over the coming year, Bahrain’s lenders will contend with a less supportive operating environment. But they will be doing so from a position of strength. As the challenges and opportunities of a post-Covid world begin to crystallise, the country’s banks will be better placed than most to capitalise on new growth avenues, while contending with the uncertainties of a market that is changing at a rapid clip.


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