MOODY'S ASSIGNS RATINGS TO BAHRAIN MIDDLE EAST BANK
Limassol, 12-17-96 -- Moody's has assigned ratings for long- and short-term foreign currency deposits and a bank financial strength rating to Bahrain Middle East Bank (BMB). Moody's assigned the following ratings:
Long-term deposits: Ba2
Short-term deposits: Not Prime
Bank Financial Strength: D
Moody's deposit ratings are opinions of an institution's overall creditworthiness and take into account factors related to external support -- for example from shareholders or financial authorities -- in addition to those which are specific to the bank itself. In contrast, bank financial strength ratings (BFSRs) reflect a bank's strength on a stand-alone basis and the likelihood that it may require support from a third party at some point in the future. As such, BFSRs exclude factors related to external support although they do take into account a bank's operating environment. In order to distinguish them from deposit ratings they use different signifiers: a letter scale ranging from "A" (exceptional) to "E" (very weak). A "+" signifier may be appended to the ratings below the "A" category.
BMB is incorporated in Bahrain where it is licensed as an offshore bank. Since the appointment of a new management team in 1993, the bank has moved away from commercial lending and is now pursuing a strategy based on investment banking and in particular, structured finance, acquisitions of unquoted investments, fund management and treasury activity.
The bank's earnings, which had been erratic and occasionally fell into loss, appear to have been put on a sounder footing: a large proportion of operating expenses is now covered from structured income and the bank has run down its commercial lending portfolio, so removing the danger of future provisioning requirements. The funding base has been made more secure, partly as a result of structured finance (including securities financed by repurchase agreements), partly through the issuance of certificates of deposits, and also through the move away from a commercial bank-type asset profile. Capitalization is strong and shareholders' equity accounts for about a quarter of all liabilities. However, Moody's believes that BMB's status as an offshore bank, its shareholder structure and its business franchise are such that the bank would not necessarily be able to count on institutional support in a stress scenario.
A new management team, which has been piloting this new course, has a clear idea of its objectives and can demonstrate success in their implementation. Asset quality is currently good. Moody's believes that the acquisition of unquoted investments is inherently risky, although in the case of BMB potential losses are more than covered by equity.
BMB has a diversified group of shareholders who are based in the Arabian Gulf. Burgan Bank, a Kuwaiti commercial bank, holds 28% of the shares. Although much of the bank's activity now involves business in western financial markets, its customer base, shareholders and, despite what has already been said about the funding structure, a significant proportion of liabilities remain rooted in the Gulf. In this context, Moody's notes that BMB is not the only institution trying to carve a niche for itself in investment banking and that this, combined with the fact that it is a small bank with only a few hundred million dollars in assets, will make it hard for BMB to establish a distinct and secure business franchise.
Moody's believes that, as an offshore bank, BMB is in practice immune from some but not all elements of Bahrain sovereign risk. An example of where offshore banks are subject to Bahraini risk would be funding sensitivity arising from political risk -- following the invasion of Kuwait in 1990 many international banks cut their lines to Bahraini offshore banks. Many offshore banks, BMB included, are also subject to risks arising from adverse economic and political conditions in the Gulf as a whole.
BMB is based in Manama, the capital of Bahrain, and had assets of $461mn at the end of 1995.
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