Chief Executive’s review

Chief Executive’s review

Significant recovery in oil prices eased the pressure on state revenues but, with regional economies so dependent on government spending, the effect is still far short of previous levels. Nevertheless, BBK closed the year with 4.0 percent growth in profitability, maintaining our record of sustained year-on-year improvement.

During 2017 we faced a particularly challenging market, with political and economic issues influencing the operating environment. The Bahrain market is expecting GDP growth, although less than forecast, with negative implications for the banking sector and for customers.

Aegila is the continuation of our expansion strategy in the investment banking and private banking sectors.

Shareholders’ equity

+5.6%

Ratio of liquid assets to total assets

34.7%

The ratio of liquid assets to total assets increased in 2017, from 32.6 percent in 2016.

BBK won an unprecedented number of industry awards during 2017.

award
award
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For all banks, not least BBK, the new regulations introduced since the 2008 financial crisis have needed investment in time and money to ensure compliance with local and international guidelines. Improved systems and technology, new procedures, and more people have all added up to higher costs.

Nevertheless, many positives compensate for the new regimen. Any measures that can help minimise the impacts of a future crisis are to be welcomed, and BBK has been at the forefront in adopting one of the most important measures – International Financial Reporting Standard 9 (IFRS 9).

BBK began early in preparing for and implementing IFRS 9, enabling us to have our compliance fully tested and operational well in advance of the 1 January 2018 target. The experience has been highly worthwhile, and the benefits are already evident. The new standard takes a wider approach to identifying credit risks and potential problems, involving a three-stage analysis of a bank’s total portfolio. The analysis eliminates systemic weaknesses and introduces more detailed assessment of political risks and those arising from the market environment.

The immediate impact of IFRS 9 is a greater need for early provisioning against credit risk, which facilitates more accurate and reliable management information on risk levels.

Strategy

Our overseas expansion continues, in line with one of the core principles of the Bank’s 2016-18 strategic cycle. Aegila Capital Management, our new investment and advisory firm, opened in London. A joint venture between BBK and Osool Asset Management, Aegila will initially focus on opportunities in UK and European commercial real estate.

Aegila is authorised by the UK Financial Conduct Authority and is staffed by a team of talented professionals drawn from some of the world’s largest and most successful investment banks, sovereign wealth funds, and private equity fund managers.

Aegila continues our expansion strategy in the investment banking and private banking sectors, aimed at broadening our service offering and increasing the weight of recurring fee-based income in the Group.

Further progress with international expansion was made with the opening in Turkey of our second representative office, a major development for BBK that enhances the Bank’s international business operations.

Our people

Women’s empowerment initiatives are always a top priority for BBK. Achieving gender equality at all levels is a continuous process, with emphasis on developing female managers through fast-track programmes.

Our achievements in this field were recognised in 2017 through receipt of the prestigious ‘Her Royal Highness, Princess Sabeeka Bint Ibrahim Al Khalifa Award for Bahraini Women Empowerment’. The award is an important initiative to support and consolidate the status of Bahraini women. Winners are chosen for their commitment to the policy of non-discrimination and success in integrating women in national development plans, attaining higher professional status for women as they achieve executive and decision-making positions.

On the training side, BBK’s e-Learning platform continues to be a vital asset in accelerating employee development. It has more than 500 tutorials and courses, including professional business skills, and is recognised as one of the best in the industry. With ‘anytime, anywhere’ access, the system’s flexibility is vital in enabling skills transfer for the Bank’s geographically dispersed workforce in the Gulf region, India, and Turkey. The platform is proving especially helpful in supporting working women, giving them access to a tool that can accommodate their needs and availability of study time.

We regard people as a highly valued asset, even maintaining links with those who are no longer members of our team. The BBK Alumni Club was formed in 2015 to strengthen the bonds between the Bank and its former employees. The club has since played a key role in showing our appreciation for the contribution of alumni to BBK’s long history of success.

Technology

Sustained investment in technology leadership has always been a BBK hallmark and is an integral part of the 2016-18 strategy.

BBK was the first to introduce ATMs to Bahrain, and continued to strive to remain pioneering in banking technology. In September 2017, BBK launched the first ITM (interactive teller machine) in Bahrain. It enables users to talk directly to customer service specialists who can help them with transactions or other requirements, reducing waiting time for customers. The ITM system has been enthusiastically received by customers and more installations are planned during the next year.

New technology has also been used to reduce waiting time for our customers. ‘Virtual queuing’ is a smartphone application that eliminates the need to go to the banking hall, collect a queuing number, and wait for the number to be called. Customers using the app are given a specific time to visit the branch, saving time and allowing them to plan their activities more effectively. The app is another BBK ‘first’. It was initially developed for doctors’ surgeries and adapted by BBK for banking purposes.

Another pioneering initiative launched during the year allows our customers to withdraw cash securely and safely from any BBK ATM without using a debit card. Our ATMs are now equipped with a cardless withdrawal option, providing customers with convenient access to cash at all times.

CrediMax also contributed to the technology drive by launching MaxWallet – Bahrain’s first smartphonebased digital wallet using credit cards. Produced in collaboration with MasterCard, MaxWallet is enabled by a quick response (QR) code that allows customers to pay for goods and services using their mobile phones.

MasterCard’s Masterpass QR provides valuable benefits for merchants, issuers, acquirers, and endusers, being fast, secure, and cost-effective. It provides a viable alternative to cash without the need for point-of-sale equipment, enabling users to safely pay for face-to-face purchases with their phones.

Transforming payment processes is regarded as the biggest opportunity since the introduction of plastic cards many years ago. As payments increasingly shift from cash to electronic, the availability of multiple channels and devices provides opportunities for digital convergence, simplifying payments and enhancing security for customers and merchants.

BBK plans even more technology initiatives for 2018, including a number of totally new digital offerings.

Unique new format

The first pilot branch of BBK Lite – our new essential services retail format – is finalised and is due to open during the first quarter of 2018, bringing simplified banking services to people that have limited access to banking facilities. The format enables quick service, catering primarily to migrant workers who need salary transfers, remittances, and other banking services. The convenient location of the pilot branch saves users having to visit central Manama for banking services. More BBK Lite branches will follow in 2018.

Subsidiaries

CrediMax is the market leader in specialised card business and has a considerable stake of the card issuance and acquisition market. This has been achieved in the face of tough competition – more than 15 issuers and three acquirers – with 29 retail banks operating in Bahrain, all offering credit and debit cards.

Our other subsidiary, Invita, also continues to perform well and strengthen its business model. During 2018, having identified the need for a Third-Party Administrator (TPA) for motor insurance claims in Bahrain, Invita approached several insurance companies to come together to form a TPA. The result was the formation of Invita Claims Management Company (ICMC), in which Invita now has the majority shareholding.

ICMC provides more efficient claim operations for insurance companies and enhanced service for customers. It processes the claims on behalf of insurers, from initial registration to assessment of damaged vehicles, engaging repairers through its network of approved garages, and final settlements.

Internal control

BBK maintains a sound internal control system and processes, ensuring they are adequate and in place across all departments within all entities, so that the Group’s assets are always safeguarded. BBK’s Internal Control Unit has implemented comprehensive procedures that help identify and manage risks that could arise in the course of conducting business. These controls are reviewed at least annually.

Awards

For the fifth consecutive year, BBK was designated ‘Best Retail Bank in Bahrain’ by Global Banking and Finance Review. The award honours companies that stand out in particular areas of expertise in the banking and finance industry. Criteria include profitability, market share, customer relations, and product innovation. BBK was recognised once again because of its outstanding achievements, dedication to retail banking, and performing highly against the judging panel’s key benchmarks.

Global Finance ranked BBK as a leader in cash management services in its annual awards for ‘World’s Best Treasury & Cash Management Banks and Providers 2017’. After a multi-tier assessment, BBK joined 55 banks around the world as the best in their respective countries. The recognition confirms BBK’s status as Bahrain’s leading provider of cash management products and services, and underlines the value of the Cashlink electronic platform. The award was presented at the SWIFT International Banking Operations Seminar (SIBOS 2017) in Toronto, regarded as one of the world’s premier financial services events.

BBK also received the 2017 ‘Elite Quality Recognition’ award by JP Morgan Chase, in recognition of the Bank’s outstanding performance in MT103 Straight through Processing (STP), achieving a rate of 98.86%. This is the eighth consecutive year that BBK has qualified for the award, with Elite status since 2014. Similarly, it was awarded the Barclays Excellence Award for GBP Straight through Processing..

CrediMax received the ‘Most Compliant Data Integrity Award’ from MasterCard, made annually to MasterCard customers demonstrating excellence in authorisation and data clearing procedures. The award underlines the continuous drive by CrediMax to lead in technology. It confirms that CrediMax maintains data integrity standards across all interfaces, programmes, services, and operations – resulting in improved authorisation response, better clearing and settlement processes, and enhanced quality of data..

Finally, as mentioned earlier, BBK’s achievements in empowering women were recognised in 2017 through receipt of the prestigious ‘Her Royal Highness, Princess Sabeeka bint Ibrahim Al Khalifa Award for Bahraini Women Empowerment’.

Security certification

SISA Information Security, the Middle East’s leading security assessor, awarded PCI DSS v3.2 certification to BBK in 2017, after the Bank achieved one of the most stringent security standards – Payment Card Industry Data Security. Compliance with standards for payment card data and successful completion of the audit requirement illustrate the security of the Bank’s system and its investment in the highest standards of safety.

Maintaining such an international benchmark is an ongoing and stringent process. BBK has laid an excellent foundation to be vigilant and ready to face any security eventuality. While acknowledging that no system can address every possible threat, achieving this standard puts BBK several steps ahead in maintaining the highest level of trust.

Conclusion

We expect 2018 to be equally challenging as its predecessor, as regional, political and economic issues continue to dominate. However, we are reasonably confident of maintaining healthy growth, based on BBK’s long-standing policies of prudence, conservatism, and provisioning adequately for distressed accounts.

In line with our strategy to seek cross-border expansion, the Bank’s assets are well split between Bahrain and external territories.

We have a good book of business across the GCC states, and our international branches and representative offices are all sourcing assets from outside Bahrain.

A number of local investment banks have changed their strategy since the financial crisis, entering the retail banking segment. There is a clear case for consolidation as smaller banks face the same challenges as larger counterparts in complying with new regulatory requirements such as IFRS 9. Consolidation would therefore provide economies of scale.

With 80 percent of government revenues still derived from oil, initiatives to diversify revenues will certainly continue in the year ahead. The effects of removing subsidies and introducing new taxes are already being felt, with value added tax (VAT) introduced in Saudi Arabia and the UAE from January 1, 2018. Other GCC states will implement VAT during 2018-19 once their specific VAT rules are officially issued.

For BBK, priorities for 2018 will be asset quality, liquidity management of existing books, and carefully planned growth. We will further strengthen the management process, pursue the remaining objectives in the 2016-18 strategic cycle, and continue monitoring our strategic performance to leverage strengths and bridge any gaps.

Appreciation

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 extend our appreciation to our loyal clients and our employees, whose dedication has contributed to the Bank’s success.

Reyadh Yousif Sater

Chief Executive