Net profit
(BD billions)

75.4

The Ministry of Finance forecasts economic growth of 2.3 percent for the year, followed by a further 2.7 percent in 2020.

Diluted earnings per share

59fils

Net interest income
(BD millions)

107.3

We launched new technology to facilitate easier money transfer, which gives customers highly-transparent, faster, and more secure services.

Retained earnings 2019
(BD millions)

144.6

BBK has repeatedly demonstrated the ability to cope with whatever challenges arise and achieve very satisfactory returns for shareholders and we will continue with our unstinting efforts to maintain this performance.

The Board of Directors is honoured to present the 48th annual report and consolidated financial statements of Bank of Bahrain and Kuwait (BBK) and its subsidiaries (the Group) for the year ended 31 December 2019.

Operating environment

Bahrain was ranked among the top-10 most improved economies in the world during 2019, according to the World Bank’s Doing Business 2020 report, moving up 19 places to 43 among the 190 countries assessed. Criteria for most improved economies include the number of economic programmes and legislative reforms enacted, and improvements in the ease of doing business.

As part of its Economic Vision 2030, Bahrain has implemented a comprehensive reform programme. The Ministry of Finance and National Economy reports that 2018’s pronounced accelerations in headline growth continued into 2019. The Ministry forecasts economic growth of 2.3 percent for the year, followed by a further 2.7 percent in 2020.

Financial support from Gulf allies will contribute to the projected acceleration in economic growth, along with low interest rates and a range of strategic projects such as Aluminium Bahrain’s expansion, The Bahrain Petroleum Company’s (BAPCO) modernisation programme, and the redevelopment of Bahrain International Airport.

Bahrain may also enjoy positive spill-overs from the steady economic growth across the Gulf region, supported by growing non-oil sectors and improving oil prices under the agreed global oil production control measures.

The Bahrain Economic Development Board (EDB) has underlined the importance of FinTech innovation and its far-reaching impact on the economy – creating new jobs, providing training for an already highly-skilled workforce, and generating foreign direct investment. The EDB notes that the financial services sector is going through an unparalleled period of disruption, and Bahrain already has the soft and hard infrastructures in place to not only handle this, but to enable innovation to thrive.

Despite this generally positive trend, the operating environment still presented many challenges for Bahrain’s banking sector during 2019, coupled with ongoing volatility in the global economy stemming from US-China trade wars, Brexit, and a general downturn in growth.

In this context, BBK’s performance is all the more commendable and reflects the prudence and caution that are integral to the Bank’s strategy and operating principles. This gives cause for continued, albeit restrained, optimism for the year ahead.

Economic policy

Bahrain’s government approved a plan in 2018 to overhaul public finances, reduce the budget deficit, and control public debt after securing a $10 billion aid pledge from Saudi Arabia, the United Arab Emirates, and Kuwait. This plan aims to eliminate the budget deficit entirely by 2022. The forecast expenditure of BD 3.25 billion in 2019 and BD 3.28 billion in 2020 is accompanied by additional public investments of BD 670 million in 2019 and an equal allocation for 2020.

The 2019 deficit is projected at BD 708 million, falling to BD 613 million in 2020. Bahrain is already experiencing the benefits in the form of reduced borrowing costs. Six-month treasury issues that used to carry a coupon of 4.0-4.25 percent are now placed at less than 3.0 percent.

Revenues for 2019 are forecasted at BD 2.74 billion, rising to BD 2.87 billion in 2020. The 2018 budget had put revenues at BD 2.3 billion, including BD 1.8 billion from oil, with spending at BD 3.5 billion – a projected deficit of BD 1.2 billion. This represented 9.8 percent of GDP but actual results exceed forecasts, cutting the deficit by more than one-third to 6.2 percent of GDP and putting Bahrain on course to achieve a balanced budget by 2022.

The government has also cut subsidies and raised taxes and fees as part of its fiscal reforms, including the introduction of value-added tax. Overall, the fiscal plan aims to balance public finances without affecting public services such as education, health, and housing. Further reforms under review include changes to the pension system and a new subsidy programme.

Strategic cycle

Building shareholder value is at the core of BBK’s 2019-21 strategic cycle, maintaining the Bank’s impressive record of year-on-year profit increases and laying the foundations for continued success.

FinTech is a dominant theme, taking BBK to the next level of digital innovation. The focus on digitalisation has reached new intensity, evident in our 2019 performance. The Bank has embarked on various new initiatives, adopting the latest technologies in line with Bahrain’s national commitment to FinTech-based innovations and technological advancements.

BBK is reviewing and upgrading platforms to introduce new channels and further enhance cyber security measures. The Bank has done well in this area, but we must respond to the rapidly changing environment and stay ahead of the market.

One example is the opening of our first digital branch. This is a tech-enabled branch focusing on sales and self-service, with cash handled through ATMs and CDMs. In another FinTech advancement, in 2019 BBK became one of the first banks in Bahrain to use Amazon Web Services and to adopt cloud-based services. We also launched new technology to facilitate easier money transfer, which gives customers highly-transparent, faster, and more secure services. Several other crucial strategic initiatives are in the pipeline and will be launched during 2020.

Other important strategic initiatives include updates regarding Bahrain and Kuwait central banks’ inspection reports, management succession planning, and executive appointments. Risk management and human recourses policies are also being reviewed.

BBK is one of the largest and systemically important banks in Bahrain. Such a strong market share can be an inhibitor to growth in such a crowded marketplace. Consolidation within the banking sector is already taking place and we must remain alert to potential acquisitions, particularly in the fast-growing Islamic finance segment.

Financial highlights

BBK achieved a net profit of BD 75.4 million for 2019, 12.4 percent higher than the previous year’s BD 67.1 million and equating to diluted earnings per share of 59 fils (52 fils in 2018). Net interest income reached BD 107.3 million, while total shareholders’ equity grew by 9.3 percent to BD 547.0 million.

The profit increase is mainly attributable to a decrease in net provisioning, by 46.5 percent to BD 18.9 million (BD 35.3 million in 2018), as a result of active management of distressed exposures and higher recovery efforts.

BBK broke new ground in 2019 by becoming the first bank in Bahrain – and to our knowledge within the Gulf region – to declare an interim dividend. The Board of Directors approved the new dividend policy at its July meeting and a half-year payment of 10 fils per share was made.

The Board of Directors recommended cash dividends of 40 fils per share (including the interim dividends of 10 fils that were declared and paid in July 2019). In additional to that, 5 percent stock dividend was recommended on the Bank’s paid-up capital to the shareholders whose names are registered on the Bank’s register on the record date subject to the approval of the Bank’s shareholders at the upcoming Annual General Meeting.

Conversion of Tier 1 Capital Perpetual Bonds to ordinary shares

Shareholders also benefited from the conversion of BBK’s Tier 1 Capital Perpetual Bonds (AT1 bonds) to ordinary shares. The bonds, amounting to BD 86.1 million were issued by the Bank with a nominal value of 100 fils per share.

The Bank had the option of converting the AT1 bonds to shares after three years at a price of 400 fils per share. At the time of exercising the option, BBK shares were trading at 440 fils, already an attractive proposition. The share price has since risen to more than 550 fils, making the converted bonds an exceptionally rewarding investment.

Medium-term note issuance

A significant success in 2019 was the issue of a USD 500 million medium-term note with a fixed coupon of 5.5 percent and five-year maturity. The senior unsecured bond was targeted to professional investors in the Middle East, Asia, and Europe and followed a successful four-day roadshow in Dubai, Hong Kong, Singapore, and London.

The investor mix was geographically diversified, with 65 percent of subscribers based in the Middle East, 28 percent in Europe, and the balance in Asia. Half of the issuance was bought by fund managers, 44 percent by banks, and the remainder by private banks and others.

More than 85 regional and international investors bought into the issue which was more than two-fold oversubscribed. The response to the issue demonstrates the confidence that investors have in BBK’s sound financial position and conservative management.

Regulatory compliance

The Central Bank of Bahrain (CBB) is invariably helpful in detailing compliance requirements, from domestic stipulations to those specified in international regulatory regimes such as the Basel III framework for banks.

New CBB compliance initiatives in 2019 include improving the accuracy of banks’ customer data bases and correcting or eliminating out of date information.

Electronic ‘know your customer’ is a standard requirement for all banks – this became a significant project for BBK in 2019 and will continue next year and beyond.

Resolving unclaimed amounts – such as uncollected dividends and money in dormant accounts – is another CBB priority. Substantial amounts are involved, and banks must take measures to disburse these funds to legitimate claimants.

Appropriations

The Board of Directors’ recommendations for appropriations of the Bank’s net profit and approval by shareholders are:

BD millions
Retained earnings as at 1 January 2019 148.9
Profit for the year 2019 75.4
Proposed appropriation for donations (2.0)
Distribution of Perpetual Tier 1 Convertible Capital Securities (3.6)
Other changes in retained earnings (1.3)
Transfer to Statutory Reserve (7.5)

Retained earnings as at 31 December 2019 available for distribution (before proposed dividend)

210.0

Proposed cash dividends (40% including 10% interim dividends equivalent to BD 12.8 million) of paid-up capital, net of treasury stock) (51.3)
Proposed stock dividends (5%) of the paid-up capital (6.5)
Proposed transfer to the General Reserve (7.5)

Retained earnings as at 31 December 2019 (after proposed dividend)

144.6

Fitch

Rating
Long-term issuer default rating BB-
Short-term issuer default rating B
Viability rating bb-
Support rating 3
Support rating floor BB-
Senior unsecured debt BB-
Outlook Stable

Report issue date: 1 October 2019

Fitch

Long-Term Issuer Default Rating

BB-

Moody’s

Rating
Bank deposits B2/NP
Baseline credit assessment B2
Adjusted baseline credit assessment B2
Counterparty risk assessment B1/NP
Senior unsecured B2
Subordinate (P)B3
Outlook Stable

Report issue date: 23 December 2019

Moody’s

Long-term debt

B2

We are confident in our compliance policies and practices and our continued ability to adhere to whatever new regulatory requirements may be introduced.

Sustainability

Sustainability has always been a high priority for BBK but this is now taking on a new dimension as global awareness becomes increasingly sensitive to environmental, social, and corporate governance (ESG) issues.

ESG is now factored into risk management, protecting against vulnerability when raising international finance. Companies are assessed not only for the strength of their operations, but on their policies and practices in taking care of society, women’s empowerment, environmental issues, and a range of allied areas that are detailed in the Sustainability section of this annual report.

Appointment of auditors

At the Bank’s Annual General Meeting held on 20 March 2019, Ernst & Young were re-appointed as external auditors to BBK for the financial year ending 31 December 2019.

Ratings

On 1 October 2019, Fitch affirmed BBK’s long-term issuer default rating (IDR) at BBwith a Stable outlook and a viability rating (VR) of bb-. Fitch says that BBK’s IDRs are driven by the standalone strength of the Bank, as indicated by its VR. The IDRs are also underpinned by potential sovereign support as shown by its Support Rating Floor of BB-. BBK’s VR is capped by the operating environment and Bahrain’s own sovereign rating of BB-.

This reflects BBK’s high exposure to the sovereign and domestic operating environment as an important retail bank in Bahrain. The VR also considers the Bank’s high impaired loans, high concentration, and only adequate capital ratios – but also its strong domestic franchise, adequate margins, and consistent profitability.

On 23 December 2019, Moody’s affirmed BBK’s IDRs at B2 Stable/Not Prime for long-term and short-term local currency deposits. The ratings capture the Bank’s standalone credit strength, reflected in its baseline credit assessment of b2, at the same level as the Bahrain Government.

This rating represents BBK’s strong domestic franchise which supports its sound profitability and solid liquidity buffers, resilient funding, and capital adequacy. These strengths are moderated by the Bank’s high deposit and credit concentrations, and asset-quality risks. Despite improvements in the operating environment, these persist from an already elevated position, as some borrowers remain vulnerable.

BBK’s long-term foreign-currency deposit rating of B3 is constrained by Bahrain’s B3 country ceiling for such deposits, which captures foreign-currency transfer and convertibility risks.

CEO award

Reyadh Sater, BBK’s Group Chief Executive, was ranked among the regional financial sector’s top 10 CEOs, out of more than 700 banks based on profitability, growth, and maintaining the highest standards of corporate governance. The announcement was made during the Top CEO Awards and Conference that took place in Bahrain on 11 April 2019. I take this opportunity to congratulate him on the occasion of this moment of pride.

Looking ahead

The next year will present many challenges as market conditions remain volatile and the pace of change becomes even faster. International factors such as trade wars and fears of a global recession are a very real problem for major nations, let alone smaller countries like Bahrain.

A negative interest environment represents a problematic outlook for the banking sector as a whole. Nevertheless, BBK has repeatedly demonstrated the ability to cope with whatever challenges arise and achieve very satisfactory returns for shareholders and we will continue with our unstinting efforts to maintain this performance.

Appreciation

On behalf of the Board, I extend our thanks to BBK shareholders for their continued confidence, to our clients for their loyalty and patronage, and to BBK’s management and employees for their hard work and commitment that underpinned yet another year of excellent results for the Bank.

On behalf of the Board of Directors

Murad Ali Murad

Chairman