Chief Executive's review

BBK faced a very challenging year, as did all banks – locally, regionally, and internationally – not least because of the many difficulties facing governments, especially in our domestic and regional environments.

Our representative office in Turkey opened during the year, prominently located in downtown Istanbul.

Perpetual bond

BD86m

BBK closed its perpetual bond for Tier 1 capital at BD 86 million, the first of its kind in Bahrain.

Close to the year-end, we reorganised and refined BBK’s structure, establishing two main business groups – Wholesale and Retail – and broadening the responsibilities of the support functions.

Online financial transactions

BBK online financial transactions have more than doubled over the last
five years.

This is the seventh year in a row that BBK has qualified for the Elite Quality Recognition award, presented to financial institutions that meet JP Morgan’s stringent processing criteria.

Low oil prices are at the core, oil being the primary source of income for all the GCC states. Expenditure levels have to be financed somehow, and governments are faced with the option of using reserves – far from ideal – or borrowing, again adding extra costs through interest.

Rating agencies’ downgrades of Bahrain and Oman have led to more expensive finance charges, with governments having to pay a higher yield when raising capital. BBK’s status as a Domestic Systemically Important Bank (D-SIB) means that we are linked to government ratings and have to bear a corresponding increase in the cost of funding.

Government demand has to some extent affected market liquidity, increasing the pressure on banks. This is not confined to 2016 and will continue for as long as oil prices remain at current depressed levels. Liquidity management has therefore been a top priority for BBK, and we have taken the necessary action to ensure that our liquidity is not only maintained but reinforced.

Consequently, we have very healthy liquidity levels, an asset that is as crucial to our future as it is to the banking sector as a whole. I believe we have dealt very effectively and efficiently with liquidity during 2016, underpinning our performance. This is evident in our bottom-line results, which show profit growth of 6 percent at year-end.

Strategic cycle

The past year was the first in our new strategic cycle, covering the period 2016-18. We have identified many new opportunities, adopting a policy of gradual rather than aggressive implementation. Two of these are particularly important.

The first entails developing a relatively untapped market. Bahrain has a large population of foreign workers who require specific services. We have analysed this segment and evaluated its potential for growth. An internal taskforce has been established to investigate further and determine the form that BBK’s tailored offering may take.

The Bank already leads the market in several retail segments – consumer loans and car loans, for example. We are capitalising on these successes and reinforcing our leadership – hence the strategic focus on new products and services, defining prospective new segments and their needs. Plans are at an early stage, but by the first quarter of 2017 we expect to announce further progress with the initiatives that are under way to further diversify and innovate within Bahrain.

The increase in net interest income achieved in 2016 indicates good balance sheet management, focusing strategically on the local market and reducing exposure to thinly priced paper. Instead we have concentrated on the more profitable segments, such as retail, which has yielded returns superior to blue-chip holdings.

Retail lending has helped boost income growth and we aim to further expand our portfolio. We also have liquidity in short-term treasury bills, offering rates that are now almost three-fold those of two years ago, in turn contributing to growth in interest income.

Strategically, high liquidity always bears a cost for banks. But considering the operating environment and the challenges facing local and regional economies, we believe that being very liquid is a positive for BBK. Consequently, we plan to maintain this position, making sure we are always prepared and ready for the unforeseen.

Our 2016-18 strategy is based on progressive implementation, choosing our moves in the context of economic realities as the environment does not encourage aggressive short-term implementation.

With this in mind, we are examining the potential for affluent services. We recognise that our retail customers sometimes need investment products – often of an international nature – and we may be able to introduce them to certain opportunities. We are therefore continuing to assess the kind of services we can offer, as a precursor to introducing them to the local market.

In terms of cross-border operations, our representative office in Turkey, prominently located in downtown Istanbul, began operations. A highly qualified Turkish woman was appointed to head the office, maintaining our long-standing policy of gender impartiality in deciding on appointments or promotions.

Perpetual bond

Another major event was the successful issue of our perpetual bond for Tier 1 capital, the first of its kind in Bahrain and, as far as we know, the first in the entire Middle East. The offer closed at the end of April and raised BD 86 million, enabling us to meet and exceed the new capital requirements stipulated by Basel III and the Central Bank of Bahrain.

The success of the bond issue resulted in BBK taking third place in the 2016 ‘Financial Institution Financing Deal of the Year’ category at the Bonds, Loans & Sukuk Middle East Awards. BBK was the only conventional bank to be shortlisted.

As a D-SIB, the Central Bank requires BBK to maintain specific levels of capital. The perpetual bond uptake resolved this issue and at the same time positioned us well to implement our 2016-18 strategic cycle, which is heavily dependent on liquidity and capital resources.

Unlike last year’s capital markets issue to replace maturing debt, which was open to international investors, the perpetual bond was restricted to shareholders, giving them the privilege of a relatively high yield. The 8.25 percent issue rate is fixed for the first five years, with an option to renew then at a return determined by prevailing market rates.

Organisational restructuring

Driven by our new strategy, a new organisation structure was announced, aimed at fostering the Bank’s three-year strategy (2016-2018), and achieving the future vision and expectations of the Bank’s shareholders and stakeholders.

The changes resulted in two business groups being established – Wholesale and Retail – each headed by a newly appointed Deputy Chief Executive.

The Wholesale Group’s responsibilities include Corporate Banking, Treasury and Investment as well as our overseas operations, namely the four branches in India, Kuwait branch, and the UAE and Turkey representative offices.

As its name implies, the Retail Banking Group is responsible for Retail banking services, in addition to Remedial management and a number of strategic projects of the Bank.

The support divisions – Human Resources & Administration, Information Technology & Operations, and Financial Planning & Control – have each been converted to Groups, assuming broader responsibilities to cover overseas branches. All these Groups report directly to the Chief Executive, as the Support Group has been eliminated as part of the restructuring.

Our people

We have continued to develop the Bank’s number one asset – our employees – by launching the BBK e-Learning platform, recognised as one of the best programmes of its kind in the industry. The platform houses the world’s most widely used financial e-learning library, containing more than 500 tutorials and courses in banking and financial services, as well as professional business skills.

It also enables ‘anytime, anywhere’ access to learning for our geographically dispersed workforce. The flexibility and convenience of the system will help enormously in accelerating the learning and development of all employees, especially in supporting working women by giving them a convenient developmental tool that also enables them to maintain a healthy work/life balance.

Our Women’s Empowerment initiatives remain a top priority. Promoting gender equality at all levels and accelerating the development of female managers through fast-track programmes has been highly effective.

The formation of the BBK Alumni Club in 2015 has strengthened the bonds between the Bank and its former employees, showing appreciation of their role in the development of Bahrain’s financial sector and in BBK’s successful journey. The second reunion of the Alumni Club was held in December and was well attended. During the reunion, the Chief Executive announced a bundle of benefits for the BBK Alumni members and also honoured former female employees who served the Bank for more than 35 years.

Technology

During 2016 we successfully tested the Bank’s business continuity centre, which confirms that BBK is ready to respond effectively in the event of an adverse incident, minimising potential damage and maintaining essential customer services.

We also migrated to the new release of branch automation across all BBK locations in Bahrain and Kuwait. The new platform not only enables our employees to provide customers with improved online transactions, but supports business continuity by using a very robust IT architecture. In line with this, we updated various technologies in our data centres, allowing faster provisioning and scalability of the Bank’s services. The Treasury back-office system was also upgraded to the latest release.

BBK remains at the forefront in meeting the Central Bank of Bahrain’s requirements for new services. All pending electronic funds transfer system services were launched on the internet banking channel, at the same time making the changes necessary to ensure that SMS transaction advices are issued for all account and card-based transactions.

We have also revamped BBK’s mobile banking channel. With a rich user interface accessible through the browsers of a wide range of smart phone devices, customers can now enjoy the convenience of being able to access the banking channel anytime and anywhere, with a more pleasant ‘banking on the go’ experience.

Our in-house technology teams worked to improve efficiency across a number of identified operational areas. The high standards of information security within the Bank were underlined by a successful review of BBK’s ISO 27001-2013 certification.

Operational excellence

BBK was awarded 2016 Elite Quality Recognition by JP Morgan Chase for our outstanding performance in achieving a best-in-class 98.8 percent for MT103 straight-through processing (STP). MT103 is a message format used by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to conduct international wire transfers, telegraphic transfers, and large-value transfer system payments. STP is the automated process of payments that increases processing speed, minimises routing errors, and lowers operational and transaction costs.

This is the seventh year in a row that BBK has qualified for this award, presented to financial institutions that meet JP Morgan’s stringent processing criteria. Less than 1 percent of JP Morgan’s funds transfer clients received the award in the last year.

Distribution networks

In December we opened a new BBK branch in the Sanad area of Bahrain, having opened the long-awaited Hidd branch earlier in the year. The Sanad branch replaces the former Refinery branch, giving customers a more convenient location, improved space, and better accessibility. BBK now has a total of 17 branches and financial malls.

Subsidiaries

CrediMax is still exploring cross-border expansion, specifically in neighbouring markets. CrediMax also officially launched its new partnership with China’s UnionPay. UnionPay cards are now accepted by CrediMax point-of-sale machines, and CrediMax is the first issuer and acquirer of UnionPay cards in Bahrain.

Invita, on the other hand, is now establishing a subsidiary in partnership with insurance companies specialised in car insurance claims between insurance companies. This initiative forms an important part of the strategic cycle for 2017.

Part of Invita’s strategic goal to diversify its business and maximise income stream, it launched the Invita Training Centre (ITC), an internationally accredited service that provides organisations and individuals with world-class foundation-level training programmes. ITC is one of the few training centres in Bahrain to hold ISO 9001:2008 certification for quality management.

Our plan to establish a joint-venture wholesale investment firm in London is at an advanced stage of implementation. We are currently recruiting the management and technical team, after which we will start operation.

Risk, credit and compliance reporting

In line with corporate governance best practice, BBK’s risk and credit function reports directly to the Board’s Risk Committee, and the Compliance and Anti-Money Laundering function reports directly to the Board’s Audit committee.

Internal control

The main role of the Internal Control Unit (ICU) is to ensure that adequate internal controls are in place in all departments and that the assets of the Bank are safeguarded. ICU has implemented well-designed and comprehensive systems and procedures that protect the Bank from risks that could arise in the course of doing business. Controls are reviewed at least annually.

Conclusion

Efficiency will continue to be a primary focus for BBK as we progress through our three-year strategic cycle. We will concentrate on using our resources as effectively as possible, working hard to produce better results with what we’ve got. During 2016, we were successful in reducing our cost to income ratio – itself indicative of efficiency improvement – and maintaining this trend will be a continuing goal.

On behalf of BBK’s management team, I thank our Board of Directors for their valued guidance in the course of the year. Our thanks go also to the Central Bank of Bahrain, the Bahrain Bourse, and the regulators of the State of Kuwait, the Republic of India, the United Arab Emirates, and the Republic of Turkey.

Finally, I would like to extend our appreciation to our loyal clients and our employees, whose dedication have contributed to the Bank’s success journey.

Reyadh Yousif Sater

Chief Executive