Financial review

Our strong financial performance is a result of our commitment to meeting our customers’ evolving needs, focusing on our strategic priorities and prudent risk management practices, which enable us to deliver sustainable returns to shareholders.

Our overall financial position remains healthy as the majority of our financial assets are loans and advances that are held on an amortised cost basis, which reduces the risk of short-term distress shocks.

Overview

The Bank continued its robust performance in 2016, achieving record profitability, in the face of strong economic headwinds, of BD 56.4 million for the year ended 31 December 2016, representing BD 3.2 million or 6.0 percent growth over 2015 results.

Key financial indicators remain healthy with Return on Average Assets at 1.5 percent and Return on Average Equity at 13.2 percent. Earnings per share decreased from 50.2 fils to 49.4 fils from the previous year, mainly because of the interim return of BD 3.6 million paid to the perpetual tier 1 capital securities shareholders. The Bank’s liquidity position remains comfortable with liquid assets to total assets at 32.6 percent as at 2016 compared to 32.0 percent in 2015.

This section provides a review of our enterprise financial performance for 2016 that focuses on the consolidated operating results and the consolidated statement of financial position of BBK including its overseas branches, its principal subsidiaries, joint ventures, associated companies, and the indirect investment in associates through subsidiaries.

The consolidated financial statements have been prepared and are presented in accordance with International Financial Reporting Standards, Bahrain Commercial Companies Law, Central Bank of Bahrain (CBB) and Financial Institutions law.

Operating results

The year 2016 was the first year of BBK’s three-year strategic plan in which the Bank continued its steady and consistent performance; maintaining proactive management of risks and costs while focusing on developing domestic and cross-border business opportunities.

Despite general weakness in economic trends regionally and globally, Net Profit, attributable to the owners of the Bank, for 2016 amounted to BD 56.4 million, up by 6.0 percent compared to the previous year. Total operating income for the year increased by BD 12.4 million or 10.2 percent and stood at BD 133.5 million, reflecting success in diversifying sources of income.

Continuing BBK’s prudent approach to risk management and provisioning, the Bank has conservatively provided for adequate provisioning levels in 2016, opting to adapt the new IFRS 9 accounting standard. This standard considers expected credit losses instead of the incurred losses mandated by the previous IAS 39 to measure impaired exposures caused by market turbulence. It includes changes in the fair market value for investments, as a way of protecting the Bank’s overall asset exposures.

Net interest income

The increase in net profit was underpinned by an 18.1 percent rise in net interest income to BD 85.8 million for 2016 (2015: BD 72.7 million). The net interest income increase was achieved through prudent deployment of liquidity in high-quality investments and treasury bills, reporting an increase of 13.9 percent and 87.7 percent respectively.

As a result of a strong growth in total earning assets, the net interest yield ratio for 2016 showed an increase to 2.5 percent compared to 2.1 percent reported last year.

Other income

Other operating income consists of non-interest income, which is earned from business activities such as dealing in foreign currencies, investment in funds other than fixed-income funds, the sale of corporate banking and retail banking services, investment trading and share of profit / loss in associated companies and joint ventures.

Total other income recorded for the year of BD 42.2 million showed a decrease of 4.5 percent compared to the previous year’s BD 44.2 million. Increased business volumes resulted in a growth in fees and commission for the year of 3.1 percent, and stood at BD 29.0 compared to BD 28.4 million reported in 2015. However, other income relating to foreign exchange, income from associated companies and joint ventures, and investment income declined to BD 16.0 million, which represents a decrease of 8.6 percent over last year (2015: BD 17.5 million).

Operating expenses

Due to the growth in business activities, the Bank’s operating expenses increased to BD 53.1 million, a growth of 6.6 percent compared to last year (2015: BD 49.8 million). Staff costs showed an increase of 6.7 percent. Other operating expenses showed an increase of 6.5 percent and stood at BD 16.3 million compared to BD 15.3 million last year. Nevertheless, the Bank’s prudent cost control policy and strong revenue-generating capability allowed it to improve its cost to income ratio to 39.8 percent (2015: 41.1 percent).

Summary statement of profit or loss

Net provisions

The Bank follows the International Financial Reporting Standard 9 (IFRS 9) with regards to accounting for the impairment of financial assets. IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss model. The new impairment model also applies to certain loan commitments and financial guarantee contracts, but not to equity investments that are subject to revaluation. Under IFRS 9, credit losses are recognised earlier than under IAS 39. The Group applies a three-stage approach to measuring expected credit losses on financial assets carried at amortised cost and debt instruments classified as FVOCI. Assets migrate through the following three stages based on the change in credit quality since initial recognition. This approach of provisioning for impairment of the Bank’s financial assets is aimed at providing more realistic estimates of the impairment in the values of the assets.

As a result of the migration to IFRS 9, net provisions reserve amounted to BD 22.6 million for 2016, 16.0 percent higher than the same period last year. While asset quality metrics deteriorated with gross non-performing loans ratio increasing to 6.0 percent and stood at BD 113.3 million as of 2016 (2015: BD 82.7 million), the Bank maintains a strong total provision coverage ratio of 112.0 percent (2015: 119.5 percent).

Comprehensive income

Comprehensive income stood at BD 67.3 million as of end of December 2016, compared to BD 20.1 million reported in the corresponding period of 2015. This was driven mainly from the significant improvement in the fair value of investment securities.

Financial position

The Group maintained a strong and liquid balance sheet, achieving growth in the financial position by BD 56.1 million or 1.5 percent, and reached BD 3,702.6 million at the end of 2016. The growth was primarily driven by an increase in investments in associated companies and joint ventures, while the surplus liquidity was prudently utilised and invested in Bahraini government debt and other, mostly investment-grade, debt.

Growth across retail and corporate segments has been robust, with the Bank achieving a good balance between both loans and advances and deposits. We remain a strong net lender in the inter-bank market, particularly in the GCC and MENA region. As at 31 December 2016, our net loans and advances-to-deposits ratio stood at 70.9 percent (2015: 66.8 percent). This represents a moderate increase in commercial lending opportunities, but nevertheless remains a strong sign of the confidence customers have in us as a financial institution in the Kingdom of Bahrain, whilst growing and optimising the use of surplus liquidity in the market.

Our overall financial position remains healthy as the majority of our financial assets are loans and advances that are held on an amortised cost basis, which reduces the risk of short-term distress shocks.

Assets

Total assets stood at BD 3,702.6 million as at 31 December 2016, an increase of 1.5 percent over BD 3,646.4 million recorded in the previous year. Loans and advances increased marginally during the year, by 0.1 percent, in line with management’s strategic directions to reduce international lending exposure and focus on less risky local credit financing activities during international financial market turbulence. However, the excess in liquidity was deployed in high liquid assets consisting of cash and balances with central banks, treasury bills, and placement with banks and other financial institutions.

The investment portfolio of the Bank is classified into the following three categories: “Financial assets at fair value through profit or loss” (FVTPL), “Financial assets at fair value through other comprehensive income” (FVOCI), and “Investments stated at amortised costs”. At the end of 2016, the quoted bonds and equities constitute 81.1 percent of the gross investments (2015: 85.1 percent). Fixed income portfolio is substantially hedged against exposure to interest rate risk or highly dominated by regional governments’ bonds and sukuk.

The Bank’s total investment securities taking into consideration the IFRS 9 classification impact has increased by BD 10.0 million or 1.3 percent and stood at BD 768.1 million at the end of 2016 mainly due to the increase in investment activities in selective domestic and international markets.

Investment in associated companies and joint venture represents the Bank’s interest in a number of associates and joint ventures as outlined in later sections of this report. The carrying value of these investments represents the Bank’s share of the net assets of these companies.

Liabilities

Current, saving and other deposits include the balances of interest-bearing and non-interest-bearing accounts due to customers on demand, and term deposits taken with different maturity dates, in various currencies and at varying rates of interest. Customer deposits for the year ended 2016 stood at BD 2,493.7 million compared to BD 2,642.9 million in 2015. The Bank continues to be successful in generating customer deposits, reflecting its success in portraying itself as a dependable and solid financial institution and leveraging its presence as a dominant player in the domestic market.

Borrowings under repurchase agreements and due to banks and financial institutions stood at BD 443.9 million compared to BD 353.9 million recorded at year-end 2015. Customer deposits continue to be the major source of funding, with customer deposits to total liabilities at 77.2 percent (December 2015: 80.4 percent).

Interest payable and other liabilities consist of accrued interest payable on interest-bearing deposits, accrued expenses and provisions.

Net interest income

BD millions

Total equity

BD millions

Customer deposits

BD millions

Loans and advances

BD millions

Total assets

BD millions

Capital adequacy

The Bank has implemented the Basel III framework for the calculation of capital adequacy since January 2015, in accordance with Central Bank of Bahrain guidelines.

Equity before appropriations stood at BD 472.4 million at the end of 2016 (2015: BD 359.2 million). While there was a growth in risk weighted assets, the Bank continued to maintain a comfortable capital adequacy ratio of 18.5 percent (2015: 14.9 percent), well above CBB’s minimum regulatory requirement of 12.5 percent.

This growth was supported by the issuance of perpetual tier 1 capital securities in 2016, which amounted to BD 86.1 million. The Group is keen to maintain a strong capitalisation in order to support future strategic plans.

Our impressive growth over the years is a result of our sustained culture of superior performance, our widespread participation in both local and international markets, and excellent customer service, which will enable us to sustain the momentum we have built over the years and enhance value for shareholders.

Consolidated statement of financial position