Al Baraka Islamic Bank’s FSR Rating Affirmed At ‘BB’
Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Bahrain-based Al Baraka Islamic Bank (AIB)’s Financial Strength Rating (FSR) at ‘BB’ on the basis of its comfortable liquidity and increased capital adequacy ratio at end Q1 2012.
The FSR remains constrained by a high ratio of impaired finances, concentration risks, very weak profitability and increased risk exposure to Pakistan. In view of the Bank’s strong ownership through Al Baraka Banking Group (ABG), the Bank’s Long and Short-Term Foreign Currency ratings are maintained at ‘BB+’ and ‘A3’ respectively.
Accordingly, the Support Level is affirmed at ‘2’. By virtue of being a retail bank, the likelihood of official support from the Bahraini authorities is assessed high. While the Outlook for all the ratings remains ‘Stable’, CI notes that AIB’s ratings could come under downward pressure if profitability continues its weak Q1 2012 trend and risk exposure moves further towards Pakistan.
AIB is one of a number of Islamic banking subsidiaries in the MENA region and further afield belonging to the Saudi-owned ABG based in Bahrain. AIB is still a small bank by all measures but claims a significant market share of Islamic banking assets in Pakistan. Although the Bank’s non-performing finances (NPFs) increased slightly in Q1 2012 after declining in 2011, management expect impaired finances to resume their downward trend during the remainder of 2012 largely due to repayment and restructuring.
Financing-loss reserve coverage for NPFs remained less than adequate with AIB’s capacity to build provisions constrained by weak operating profitability.
Notwithstanding the significant amount of unprovided NPFs secured by collateral, real estate security may prove difficult to realize given the current depressed state of the regional and Bahraini real estate sector. Accordingly, collateral should only be considered as partial loss mitigation. The Bank’s unprovided NPFs constituted a significant proportion of free capital.
Net and operating profitability remained very weak due to the twin effect of low income generation and a large cost base. AIB’s ongoing weak financial performance suggests more effective measures need to be undertaken by management to address the very low levels of net and operating profit.
Although there remained some customer deposit concentrations, liquidity was at a comfortable level. The Bank’s ongoing cautious financing policy has contributed to a year-on-year rise in liquid asset holdings.
Incorporated in Bahrain in 1984, AIB operates as a retail bank under a license granted by the Central Bank of Bahrain (CBB). AIB is a 91.1% owned subsidiary of ABG, which is majority owned by Sheikh 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, one of the top five Saudi companies. 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.
The Bank operates through 89 commercial banking branches in Pakistan, situated in the major cities. In Bahrain, banking operations are conducted from the head office and 6 branches. Total assets at end 2011 were $1,598m and total capital $179m.
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