The recent news of the potential merger between Bahrain Islamic Bank (BisB) and Al Salam Bank-Bahrain (ASBB) has brought some respite to the sluggish merger and acquisition space in the Islamic banking industry. BisB’s merger plans not only provide optimism for value creation in the kingdom’s saturated market, but also offer an opportunity for the bank to improve its standing as it continues to recover from the recent financial crisis.
Furthermore, despite being Bahrain’s pioneer Islamic bank, BisB only commands a 6% market share of the kingdom’s onshore banking industry. With the enlarged BisB-ASBB expected to create the largest Islamic bank in Bahrain in terms of assets, the merger could provide just the leg-up BisB needs to command a wider presence in the kingdom and strengthen its business.
Merger a good fit
To recap, BisB and ASBB announced last month that they are in discussions for a merger, a move which has already received the approval of the Central Bank of Bahrain. The two banks have also appointed KPMG Fakhro as advisor for the planned merger.
“The combined entity would be a major player in the local market and have total assets of BHD1.7 billion (US$4.5 billion) and shareholders’ equity of BHD337 million (US$893.8 million). As such, the two entities make a good fit with an aggregate capital adequacy that we estimate to be 22%, which provides some good cushion for the large stock of problem financings still to be worked through by BisB,” said Moody’s in a recent report.
It added that due to the diversity constraints and difficult operating environment seen in Bahrain, in addition to the fragmented Islamic and regional banking industry, a merger of BisB and ASBB will be credit positive for BisB. Moody’s rating of ‘Ba1’ for BisB is on review for a possible downgrade.
Still weighed down by provisions
Commenting on BisB’s footing, Moody’s said that although the bank possesses a strong franchise in Bahrain, specializing in corporate and retail banking, and reported stable top-line revenue and total income in the past two years, the bank also recorded significant impairments and associated provisioning.
Last year, BisB booked total provisions of BHD38.3 million (US$101.6 million), comprising BHD20.3 million (US$53.8 million) for its financing and investment portfolios and the remainder to account for mark-to-market losses in its real estate portfolio.
Although BisB has not published its full financial statements for the second quarter ended the 30th June 2011, its results do show that its impairment provisions for bad debts have declined since its peak of BHD24.61 million (US$65.2 million) reached in 2009, amounting to BHD1.35 million (US$3.6 million) versus BHD5.36 million (US$14.2 million) in June 2010.
The bank also reported a net profit of BHD1.68 million (US$4.5 million) in the second quarter of 2011 against a net loss of BHD6.88 million (US$18.2 million) in the previous corresponding period.
Strengthening its business
Despite the declining provisions, BisB also still contends with rebuilding its capital base as a result of net losses recorded in 2009 and 2010. In July this year, it completed a rights issue which raised BHD21.1 million (US$56 million) in fresh capital and boosted its Tier 1 capital ratio to 18%, from 16.82% as at the 30th June.
The capital raising has been necessary as the bank has seen its capital decline in the past two years, with its Tier 1 capital before deductions falling to as low as BHD98.89 million (US$262.3 million) at the end of 2010.
According to Moody’s, BisB could have faced a shortfall in capital had it not completed its rights issue, which had been delayed to July as a result of the political and market instability in Bahrain earlier this year.
On top of this, if the bank’s merger with ASBB is completed, the enlarged shareholders’ equity of BHD337 million will also go some way toward further boosting the new entity’s capital base and buffering BisB’s existing bad debt.
BisB has not disclosed the amount of its non-performing facilities up to the 30th June this year, but as of December 2010, its non-performing Murabahah receivables and non-performing Musharakah investments amounted to BHD97.88 million (US$259.7 million) and BHD31.68 million (US$84 million), respectively, while its impaired Mudarabah investments stood at BHD12.89 million (US$34.2 million).
A capital boost is not the only benefit BisB could see from merging with ASBB. While individually, both banks’ market shares are in the single digits, together the enlarged entity could have a combined market share of almost 12%.
As BisB looks towards a brighter future following the recent financial crisis, its potential merger with ASBB could just provide the impetus it needs to emerge as a stronger institution with healthier fundamentals.