As the majority of our financial assets are loans and advances that are held on an amortised cost basis, the risk of short-term distress shocks is reduced, and thus a healthy overall financial position is upheld.
BBK's financial performance has been achieved through our commitment to fulfill customers' evolving needs. We have focused on our strategic priorities and disciplined risk management, enabling us to deliver long-term sustainable returns to shareholders.
Net interest income
Loans and advances
In spite of the tough economic conditions and turbulences, the Bank managed to maintain its high performance in 2017, achieving record profitability of BD 58.7 million attributable to shareholders for the year ended 31 December 2017, representing BD 2.3 million or 4.0 percent growth over 2016 results.
The key financial indicators of the Bank remain healthy with a return on average assets of 1.6 percent and a return on average equity of 12.1 percent. An annual return of BD 7.1 million was paid to the perpetual Tier 1 capital securities shareholders, the earnings per share decreased from 49 fils to 48 fils. The Bank’s liquidity position remains stable with liquid assets to total assets at 34.7 percent (2016: 32.6 percent).
This section provides a review of our Group’s financial performance, focusing on the consolidated operating results and BBK’s consolidated statement of financial position, including its overseas branches, principal subsidiaries, joint ventures, associated companies, and indirect investment in associates through subsidiaries.
The consolidated financial statements have been prepared and are presented in accordance with the International Financial Reporting Standards, Bahrain Commercial Companies Law, Central Bank of Bahrain (CBB) requirements, and Financial Institutions law.
The year 2017 was the second 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 the general weakness in economic trends regionally and globally, the Net Profit for 2017 (attributable to the owners of the Bank) increased by 4.0 percent from last year, amounting to BD 58.7 million. The total operating income for the year increased by BD 9.5 million or 7.1 percent and stood at BD 143.1 million, reflecting the success in diversifying sources of income.
Continuing BBK’s prudent approach to risk management and provisioning, the Bank conservatively provided for adequate provisioning levels in 2017, applying the 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
Net interest income increased by 5.9 percent to BD 90.9 million (2016: BD 85.8 million). This was achieved through prudent use of liquidity in high-quality investments and treasury bills, respectively reporting increases of 10.8 percent and 19.4 percent.
As a result of the strong growth in total earning assets, the net interest yield ratio increased from 2.5 to 2.7 percent.
Summary statement of profit or loss
Consolidated statement of financial position
Other operating income consists of non-interest income, derived from business activities such as dealing in foreign currencies, investing in funds other than fixed-income funds, the sale of corporate banking and retail banking services, and investment trading.
An increase of 10.5 percent was recorded for total other income, rising to BD 46.6 million from the previous year’s BD 42.2 million. Increased business volumes resulted in 6.2 percent growth in net fees and commission to BD 31.1 million (2016: BD 29.3 million). Other income relating to foreign exchange, income from associated companies and joint ventures, and investment income increased to BD 19.8 million, up 24.2 percent from 2016 BD 16.0 million.
Due to the growth in business activities during the year, the Bank’s operating expenses increased by 1.6 percent, from BD 53.1 million to BD 54.0 million. Staff costs increased by 3.6 percent, while other operating expenses decreased by 2.1 percent. Other operating expenses stood at BD 15.9 million (2016: BD 16.3 million). Nevertheless, the Bank’s prudent cost control policy and strong revenue-generating capability enabled improvement in its cost to income ratio to 37.8 percent (2016: 39.8 percent).
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 (fair value through other comprehensive income). 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 value of the assets.
The net provisions reserve amounted to BD 29.0 million for 2017, 28.1 percent higher than the previous year. The Bank’s asset quality metrics improved, with the gross non-performing loans ratio decreasing to 5.8 percent (BD 107.5 million compared to BD 113.3 million in 2016). The Bank maintains a strong total provision coverage ratio of 104.5 percent (2016: 112.0 percent).
The Bank’s comprehensive income stood at BD 65.0 million for the year ended 31 December 2017, compared to BD 67.3 million at the end of 2016. This was mainly driven by the significant improvement in the fair value of investment securities.
The Group maintained a strong and liquid balance sheet, achieving growth of BD 60.5 million in the financial position (1.6 percent) to reach BD 3,763.1 million. The growth was primarily driven by an increase in cash and balances with central banks, while the surplus liquidity was prudently invested in Bahraini government debt and other debt, mostly investment-grade.
The Bank has been consistent in achieving a good balance between deposits and loans and advances. It remains a strong net lender in the inter-bank market, particularly in the GCC and MENA region. As at 31 December 2017, the ratio of net loans and advances to deposits stood at 66.3 percent (2016: 70.9 percent). This represents a slight decrease in commercial lending, but still remains a strong sign of the confidence customers have in the Bank as a financial institution in the Kingdom of Bahrain, whilst optimising the use of surplus liquidity in the market.
The overall financial position remains healthy as the majority of the financial assets are loans and advances that are held on an amortised cost basis, which reduces the risk of short-term distress shocks.
Total assets stood at BD 3,763.1 million as at 31 December 2017, an increase of 1.6 percent over 2016’s BD 3,702.6 million. Loans and advances decreased slightly (1.5 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 instability. However, the excess in liquidity was deployed in high liquid assets consisting of cash and balances with central banks and treasury bills.
The investment portfolio of the Bank is classified into 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 2017, quoted bonds and equities constituted 81.8 percent of the gross investments (2016: 81.1 percent). The 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 decreased by BD 19.1 million or 2.5 percent and stood at BD 749.0 million at the end of 2017. This was mainly due to the decrease 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.
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 stood at BD 2,623.6 million at the end of 2017 (2016: BD 2,493.7 million). 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 354.8 million (2016: BD 443.9 million). Customer deposits continue to be the major source of funding, with the ratio of customer deposits to total liabilities at 80.4 percent (2016: 77.2 percent).
Interest payable and other liabilities consist of accrued interest payable on interest-bearing deposits, accrued expenses, and provisions.
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 498.6 million at the end of 2017 (2016: BD 472.4 million). The Bank continued to maintain a comfortable capital adequacy ratio of 20.0 percent (2016: 18.5 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 2017, amounting to BD 86.1 million. The Group is keen to maintain strong capitalisation to support future strategic plans.
Our noticeable 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 enables us to sustain the momentum we have built over the years and to enhance value for shareholders.