Chief Executive’s review

Murad Ali Murad

Despite the challenges faced by Bahrain and the regional banking sector, BBK has maintained its record of sustained profitability and achieved growth of 14.4 percent in 2018, compared to 4.0 percent in 2017.

+1.8%

Return on average assets was 1.79 percent in 2018, compared to 1.62 percent in 2017

13.7%

Return on average equity improved to 13.65 percent in 2018, up from 12.07 percent in 2017

35.8%

Cost/income ratio improved to 35.8 percent, from 37.8 percent in 2017.

+12.6%

Total income
Total income was 161.2 million in 2018, up from 143.1 million in 2017.

2018 161.2
2017 143.1

Eclectic

We choose the best from all available options, whether recruiting new talent or developing new products and services for our customers.

Innovative

We have many banking ‘firsts’ to our name, from the introduction of ATMs to credit cards, mobile and phone banking, and adoption of digital technology.

Despite the challenges faced by Bahrain and the regional banking sector, BBK has maintained its record of sustained profitability and achieved growth of 14.4 percent in 2018, compared to 4.0 percent in 2017.

We welcome the Gulf Cooperation Council (GCC) aid package which was announced towards the end of the year. It will help relieve fiscal pressure and will hopefully reflect positively across all sectors of the economy. However, with our economy heavily dependent on the performance of the global oil and natural gas markets, recent price gyrations have led to a certain amount of uncertainty regarding the short-term impact on the regional economies.

Strategy

The banking industry will continue to transform by embracing digitisation and automation – this is the new reality and we have recognised the need to adapt and change. During the year, we retained the services of internationally-regarded consultants to help craft BBK’s new three-year strategy, taking on the challenges of the global market for financial services.

As part of on-going improvement and efficiency efforts, we have studied cost-effective solutions by possibly outsourcing and forming alliances that can help us to improve services. This strategy is designed to strengthen our market share – not merely maintain it.

Our asset base is now well diversified, with healthy allocation between Bahrain and overseas. But revenue is mainly derived from Bahrain because our international branches and representative offices book much of their business through Bahrain.

We are also extending our reach into countries such as Saudi Arabia and Oman, in addition to those where we have presence now: Kuwait, India, the United Arab Emirates, Turkey, and the UK.

BBK Bahrain

Bahrain is our home and primary market, but the Kingdom has faced a number of economic challenges. This has reflected negatively on the sovereign rating and imposed certain constraints on banks.

The government has an ambitious programme to reduce Bahrain’s fiscal deficit, including the introduction of value-added tax (VAT) on 1 January 2019. Bahrain citizens and residents will need to fully understand the VAT mechanism that will involve dealing with different parties, consumers, and taxpayers in collecting VAT – something entirely new to the country. At BBK, we have the theoretical knowledge to handle VAT, but we made the decision to retain a specialist consultant to help us prepare.

During 2018 we also focused on protecting BBK’s domestic market share. Bahrain has numerous banks, mostly chasing the same business. We expect competitive challenges to intensify in the coming years.

The Central Bank of Bahrain (CBB) has categorised BBK a D-SIB (Domestic Systemically Important Bank) and issued a new rulebook module for governance. At BBK, we have welcomed this initiative, assuming additional responsibility for the Bahraini banking industry.

The launch of BBK Lite has brought innovative banking facilities to expatriate workers, a segment that has historically been underserved.

It aims to be the perfect match for employees and corporates who employ a large number of expatriates in sectors such as construction, hospitality, and general services.

For employers, BBK Lite provides state-of-the-art processing that simplifies transfers to employees’ accounts through automated and cost-effective systems. For employees, it offers enhanced services such as low-cost remittances to loved ones anywhere in the world, new or top-up loans, and bespoke savings accounts that simplify their everyday banking.

BBK Lite was piloted in March 2018, with two further Lite branches subsequently opened, each offering a blend of personal services and the latest smart teller machines to create a welcoming environment that is convenient to our customers’ workplaces and homes.

As part of the Bank’s initiative to strengthen market position and enhance its range of client offerings, the Private Banking and Wealth Management Division was formed during 2018, under the brand name BBK Privé.

BBK Privé differentiates itself from the upper mass segment, giving affluent clients an integrated banking solution encompassing assets, liabilities, investment products, and other services to suit their particular needs.

The brand name and identity have been developed to position this exclusive offering as an integral part of BBK’s brand and heritage. The BBK Privé team of wealth management specialists will continue to grow with new hires of experts, and will capitalise on the full spectrum of the Bank’s resources to provide the ultimate level of service to our elite clients.

BBK Kuwait

Kuwait’s external balance sheet is exceptionally strong, with sovereign net foreign assets estimated at 560 percent of GDP. However, the country is heavily oil-dependent, accounting for around 70 percent of budget revenues. The private sector largely relies on government projects and subsidies, limiting its shockabsorption capacity and fiscal flexibility.

Key areas of focus for BBK Kuwait have included maintaining the quality of its loan portfolio, diversifying sectoral exposures, reducing non-performing loans, and increasing fee-based income. Our performance in 2018 reflected improvements in each of these areas, with growth across the core business.

Inspection by the Central Bank of Bahrain during 2018 included assessment of the Kuwait branch’s organisational structure, business strategy, performance, governance, and asset quality.

BBK India

India has emerged as the world’s fastest-growing economy, with 8.2 percent GDP growth forecast for 2018. It is now the sixth largest economy, with GDP of $2.6 trillion, soon expected to overtake the UK in fifth place.

With four branches located in Mumbai, New Delhi, Hyderabad, and Kerala, BBK India is competing well in the country’s highly dynamic banking sector.

During 2018, healthy growth was seen in deposits and net loans and advances. Asset growth was nearly double the industry average, while non-performing assets were extremely low, compared to the sector average.

BBK India’s growth, profitability, and business quality have been consistent and sustainable. Having established strong relationships with reputed corporates, and well-planned diversification of revenue sources through our retail and related businesses, BBK India is expected to significantly enhance shareholder value in the future.

BBK Dubai

The Bank’s UAE representative office, located in Dubai, is a highly active operation that has achieved steady business growth for many years. It primarily targets bilateral and syndicated corporate exposures, liaising with BBK Bahrain to provide term loans and related services to selected businesses operating across the seven emirates of the UAE.

BBK Dubai also supports the Bank’s Mumbai branch in India, providing liaison services for non-resident Indian customers based in the Emirates.

BBK Istanbul

Turkey is the second most populous country in Europe. It has a highly diversified production base and a very much private-sector led economy, with an enterprise culture that goes back centuries.

During 2018 – the second year for BBK’s Istanbul representative office – budget and net asset targets were achieved and exceeded. The focus has been on corporates and banks by participating in syndicated lending. A new relationship was established with the European Bank for Reconstruction and Development (EBRD) through participation in the first corporate loan to a Turkish client.

CrediMax

BBK subsidiary CrediMax is a pioneer credit card issuer and acquirer. The 2018 launch of MaxWallet illustrates how innovation has helped the company to maintain its market leadership status by further broadening and improving its range of services. The virtual wallet app enables customers to make purchases without presenting their credit cards. The app is available from the Apple and Google stores, and a growing number of merchants have signed up for their customers’ convenience.

CrediMax continues to innovate by harnessing new technologies – such as enabling QR code acceptance and the introduction of the Thameen rewards programme, which credits customers with points that can then be redeemed for flights, hotel stays, and unique shopping experiences.

In the years ahead, as card products continue to evolve and align with new digital channels, we will continue to refine the business model of CrediMax, including considering new alliances with providers of goods and services to further simplify our customers’ financial transactions.

Invita

BBK subsidiary Invita is a leading multi-lingual contact centre that provides a range of inbound and outbound services around the clock. The company operates across diverse industries including banking, insurance, retail, utilities, and airlines.

Technology has always provided Invita with a competitive edge, most recently with mobile apps and social media utilised as new customer touchpoints. Developing new concepts such as artificial-intelligence driven chatbots was a 2018 highlight, along with launching Bahrain’s first digitised insurance claims processing service.

The Invita Training Centre passed its first audit by the Bahrain Quality Assurance Authority, and work continues to upgrade Invita’s certifications. With the advances in fintech and other technologies further improving customer service, Invita looks forward to sustainable growth in the years to come.

A GCC-level forum of the Ministries of Labour and Social Affairs commended Invita for its efforts in creating jobs for Bahraini nationals. Invita has been coordinating with the Ministry of Labour on its hiring requirements, providing opportunities to candidates who have registered with the ministry. Invita’s Training Centre contributes to the training and upskilling of such candidates.

Aegila

In its first full year of operation, Aegila Capital Management has become established in its core target markets and rapidly developed its network across Europe. The firm’s nascent advisory business, servicing Middle Eastern and European investors, has also undertaken its first assignments.

Aegila completed two important transactions in 2018: the €86.5 million acquisition of Unilever’s headquarters building in Rotterdam, Netherlands, and the €145 million purchase of a 56,000 m² office building in Essen, Germany, tenanted by Evonik Industries and Thyssen Krupp.

Over the coming year, the firm will focus on growing its real estate investment advisory business and its corporate finance advisory activities.

Our people

Training and skills development continue to be a BBK priority, with 2018 activities embracing the full spectrum of management and employees. Among an extensive range of courses and subject matters, four are particularly noteworthy.

At managerial level, 20 staff members have embarked on a high-grade leadership programme in cooperation with UK-based business school, Ashridge Executive Education. The eight-month course is aligned with the Bank’s succession planning, which seeks to nurture a culture of continuous learning and has been customised for BBK’s leadership competencies framework.

A further 20 employees are undertaking an early leadership training programme accredited by the Institute of Leadership and Management, one of the largest professional leadership and management bodies in the UK.

All branch and financial mall managers completed a first-of-its-kind branch management simulation programme in collaboration with the Bahrain Institute of Banking & Finance. The programme was specifically tailored for BBK and simulates real business cases and situations.

e-Learning continues to be a primary focus, with an increasing number of employees benefiting from studying specialisations that range from credit and investment to professional banker certification.

The Bank strengthens its bonds with valued former employees through the BBK Alumni Club. Held in 2018, the club’s third annual reunion again showed appreciation for the contribution of alumni to BBK’s long history of success.

Technology

The world of banking is rapidly changing. Well established systems and services that were previously sufficient are becoming outdated, and digitisation and automation are accelerating this trend. Today, competitors are not necessarily located in the countries in which we operate. Customers are using internet-based devices to handle many of their financial needs – no matter where they are, where they reside, or where their bank is domiciled.

In response to this global trend, we not only have to follow – we have to develop new products and services that match and improve on what the international market has to offer. Underlining BBK’s commitment to technology, the Bank hosted Bahrain’s first Emtech Summit & Expo, in cooperation with the Bahrain Institute of Banking & Finance. The theme of the two-day event in October was ‘Technology that Changes the Paradigm’, focusing on the importance of emerging technologies and how they will reshape the economy. Local and international experts came together to deliver insightful sessions and panel discussions on new topics relevant to emerging technologies and the economic conditions that will impact the Bahraini market.

BBK is also a founding partner in Bahrain FinTech Bay (BFB), the largest dedicated fintech hub in the Middle East and Africa. The partnership aims to accelerate the pace of innovation in the banking sector and create opportunities and solutions that further promote the development of Bahrain. BFB comprises state-of-the-art facilities, co-working spaces, communal areas, and a variety of other shared infrastructure. As a co-founding partner, BBK has its own station in the fintech incubator.

Internal control

The Group maintains a sound adequate internal control system and processes which are in place across all BBK departments, branches, and entities with the objective of safeguarding the Group assets. The dedicated Internal Control Unit has implemented well-designed and comprehensive systems and procedures that assist in identifying and managing risks that could arise in the course of conducting business. These controls are reviewed and updated periodically and as required.

Certification

BBK again achieved 2018 certification for compliance with the Payment Card Industry Data Security Standards (PCI DSS), the only standard dedicated to security of cardholder data and rated as one of the most stringent security standards.

Successful completion of the demanding compliance audit was the result of cooporation between Bank departments and the support of management. Organisations holding PCI DSS certification have demonstrated their ability to maintain payment account security throughout the transaction process and experience minimal data breaches.

Awards

For the fifth consecutive year, BBK was awarded by Global Banking and Finance Review. It was designated ‘Best Corporate Governance Bank in Bahrain, 2018’ and ‘Best Online Bank in Bahrain, 2018’. These awards are highly reputed within the global banking and financial community and BBK is proud to be recognised once again because of its achievements, dedication to retail banking, and performing highly against the judging panel’s key benchmarks, especially in the corporate governance area.

BBK has also received the prestigious Straight Through Processing (STP) Quality Award 2018 from Citi, recognising outstanding performance in executing international payments in US dollars.

These awards are given to banks that demonstrate the highest standards in clearing client funds transfer, trade finance and international settlements, achieving the highest STP rates, i.e. percentage of automated payment transactions completed without additional manual intervention.

Our subsidiary CrediMax was also awarded by Capital Finance International for its e-wallet, MaxWallet named as ‘2018 Best Digital Wallet GCC’.

Outlook

The GCC’s $10 billion long-term aid package and Bahrain’s programme of economic reforms are only a start to improving the domestic economy. There are high expectations from government, the commercial sector, and the public. Bahrain’s sovereign rating is expected to improve, considering the recent move by rating agencies to revise the country’s outlook from negative to stable, which should help the government and banks to borrow at more reasonable rates.

Another challenge will be the impact of the introduction of value-added tax, from both a managerial and social point of view. We have studied the situation carefully and believe that BBK will be successful in implementing the required changes.

Our priorities remain quality of management, quality of assets, and service to our customers. We are also actively pursuing the direction and sophistication of banking in the decade ahead, particularly as it relates to digitisation. Expansion and diversification initiatives such as BBK Lite and BBK Privé are still at an early stage and, although our rationale is long-term, they are already showing great promise.

Even the first BBK Lite branch had a much broader offering than originally envisaged, and we now have locations identified and property agreements signed for several more. Their percentage contribution to revenue will be low to begin with, but it takes time for a new business to mature and we are confident that the contribution will grow to a significant level.

The same applies to BBK Privé, primarily a niche offering to serve affluent clients, but a market of considerable value and regional potential. We are confident that, in time, it will make a proportionate contribution to revenues.

Appreciation

On behalf of all my management colleagues, I express appreciation to our Board of Directors for the support and guidance they consistently extend to us. Similarly, our thanks go to the supervisory authorities in the territories where we operate – the Central Bank of Bahrain, the Bahrain Bourse, and the regulators of the State of Kuwait, the Republic of India, the United Arab Emirates, the Republic of Turkey, and the United Kingdom.

Finally, I extend whole-hearted appreciation to our loyal clients and our employees, whose dedication contributes so much to BBK’s continued success.

Reyadh Yousif Sater

Chief Executive