BANKING: Squeeze puts the pressure on margins

24 November 1995

Everyone is feeling the pinch from a tighter economic climate and Bahrain's commercial banks are no exception. Competition is forcing down margins, and bankers are having to broaden the range of their activities to meet the changing demands of consumers and the financial needs of local business. The consequence is a mixed outlook for profits and bankers are talking of consolidation rather than new conquests.

The best performance so far this year has come from Al-Ahli Commercial Bank which reported a 24 per cent rise in profits to BD 4.2 million for the first nine months of 1995, compared with the same period last year. Bank of Bahrain & Kuwait (BBK) and Bahraini Saudi Bank reported profits at the end of September of BD 9.4 million and BD 2.3 million, respectively. In both cases this is only slightly higher than at the same time last year. Among the smaller local players, including the joint venture Grindlays Bahrain Bank and the two-year-old commercial arm of Faysal Islamic Bank of Bahrain, improved earnings are also expected. But National Bank of Bahrain, the largest domestic player, is having a harder time and reported a 24 per cent drop in profits to BD 8 million.

Banks are deriving these results from streamlined balance sheets. Bahrain Monetary Agency (BMA - central bank) figures show combined commercial bank assets at the end of June 1995 of BD 3,523 million, compared with BD 3,586 million at the end of December 1994. This reflects the more prudent approach being adopted by local bankers. 'Whether we like it not risk management is the issue we have to worry about, because if we do not choose it, it will be imposed,' says NBB general manager Abdul Razak Hassan. 'Yes, it is a more conservative approach. Banks have to manage the right size of portfolio.'

This more sober attitude is evident in the market for consumer loans. The rapid increase in demand for consumer loans since the end of the 1980s raised concerns at the BMA which in mid-1994 issued a circular calling for restraint, amid fears that banks were beginning to overexpose themselves. The warnings appear to have been heeded. In the first six months of this year, combined loans and advances of commercial banks rose only BD 20 million to BD 898 million.

This has not discouraged local banks from developing new products to fit the changing demands of customers. 'Lending offers very little room for growth, but on the investment side there is a lot of room,' says Hassan. Both NBB and BBK successfully launched guaranteed funds this summer. The NBB fund was intended to raise $30 million from investors but the response was so great that the fund eventually closed at $50 million.

BBK raised $30 million for its fund and is looking at ways to broaden its range. 'We will continue to look at similar products which will meet the demands of the market place and have reasonable risk attached with reasonable return,' says Murad Ali Murad, general manager and chief executive officer of BBK. 'We may look at something in the future as far as Islamic products are concerned, possibly in 1996.'

The corporate sector is also making greater demands on the local banks. The government drive to set up new small and medium sized businesses is being spearheaded by the Bahrain Development Bank, but the commercial banks are being encouraged to join the effort. 'We are hoping to pick up the customer later on and do working capital finance,' says NBB's Hassan.

Bankers are eager to get involved in plans for grander privately financed projects in sectors which were once the exclusive preserve of the public sector. One such proposal being considered is a privately financed power and desalination plant, although progress has been slow. 'We need one or two of these projects to be actually implemented. We have not got to that stage yet,' says BBK's Murad. When the time does come local financiers will have much to learn. 'There has been a lot of talk, a lot of discussions back and forth, but we have not had experience of putting financing together, in the form of equity or loans, in projects previously done by the government.'

Until these projects at home are given the go ahead, several banks are developing their expertise in the Gulf and further afield. 'As far as international business is concerned, we are looking more closely at GCC countries as demand for borrowing increases,' says Murad. Its regional reach includes a branch in Kuwait and an affiliate in Muscat, the Bank of Oman, Bahrain & Kuwait. Since 1986, BBK has also operated a branch in Bombay, and in March 1995 it opened a second Indian branch in Hyderabad. Both these branches concentrate on short-term trade finance and lending. Murad explains the move outside Bahrain: 'This market is limited and has certain economic cycles, and so when it reaches a low point we can complement our activities from outside.'

NBB also sees a need to develop a broader reach, mainly through trade finance business related to the region. 'We are working and planning to expand our regional and international business, but it is important to realise that the domestic market will be our main focus,' says Hassan.

These are leaner times for Bahrain's financial community. And there is no sign that the competition will become any less challenging, with about 20 licensed commercial banks, more than half of which are international operations. 'Its a tough business climate,' says Michael Fuller, chief executive of Al-Ahli. 'But it's fun really. I guess if it was easy it wouldn't be fun.'


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