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BAHRAIN BANK MERGERS ARE GOOD NEWS FOR THE KINGDOM AND THE GULF

It is likely that a merger of NBB and BBK would take the new bank into the top
30

By Andrew Cunningham
April 29, 2024, 1:56 PM
 * 
 * 
 * 
 * 

Alamy via Reuters
Customers queue for the National Bank of Bahrain. A merger of NBB and Bank of
Bahrain and Kuwait would be in the top 30 of GCC entities

Announcements on bank mergers in Bahrain – one completed and one still being
contemplated – are welcome news for the local banking sector and wider Gulf
markets. 

Bahrain’s Al Salam Bank announced earlier this month that it would buy the local
subsidiary of Kuwait Finance House (KFH). On April 21 the subsidiary’s
long-standing CEO, Abdulhakeem al-Khayyat, stepped aside. 

KFH bought Bahrain-based Ahli United Bank in 2022 and has been integrating
Ahli’s operations and subsidiaries into its own corporate structure. Al Salam, a
sharia-compliant bank, has taken the opportunity to acquire an existing
sharia-compliant portfolio, as well as the well-established domestic business of
Ahli United. 

The transaction brings further consolidation to Bahrain’s sharia-compliant
banking sector. Four years ago, National Bank of Bahrain (NBB) completed its
takeover of Bahrain Islamic Bank. 

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Al Salam’s acquisition is important, but the other merger that is being
contemplated is potentially more significant.

Earlier this year, NBB and Bank of Bahrain and Kuwait (BBK) announced to the
Bahrain Bourse that they were exploring a merger. These two banks have been the
pillars of Bahraini domestic banking, both retail and wholesale, for decades.
NBB was licensed in 1957 and BBK in 1971. 

The larger Bahraini banks are foreign-owned, so a merger of NBB and BBK would
create a single Bahraini national champion that would have the balance sheet
size to compete with GCC banks both at home and abroad. 

Ahli United Bank was the largest Bahraini bank, when ranked by equity, before
its takeover by KFH, although most of its business was outside Bahrain. The
second largest, Bank ABC, is majority owned by the Central Bank of Libya (59
percent), whose governor is the bank’s chairman. The Kuwait Investment Authority
also has a 30 percent stake in Bank ABC.

Gulf International Bank (GIB), the third largest, is almost wholly owned by
Saudi Arabia’s Public Investment Fund. 

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Bank ABC had equity of $4.8bn at the end of 2023, and GIB had $3.4bn. 

As for the wholly sharia-compliant banks in Bahrain, both Ithmaar Bank and
Al-Baraka are closely tied to Saudi investors. Their operations in Bahrain are
important, but are part of much wider, international banking networks.

So, what would a combination of NBB and BBK look like? 

Both are among the smaller of the 70 active GCC commercials. It is likely that a
merger would take the new bank into the top 30. 

The banks are comparable in size. At the end of 2023, NBB had equity of $1.5bn
and BBK $1.7bn. NBB has a loan portfolio of $6.7bn compared with BBK’s $4.3bn.
Their customers’ deposits were $9.3bn and $5.8bn respectively. 

BBK has four branches in India and one in Kuwait. NBB has branches in Saudi
Arabia and the UAE. 

> Bahrain has done well to consolidate its banking system and reduce the number
> of small institutions that are no longer viable

A merger would also offer opportunities for reducing the duplication of physical
branches in Bahrain and other infrastructure in what is a crowded banking
market. 

Both banks are effectively controlled by Bahraini government investment funds,
so the question of whether to press ahead with a merger is one for the Bahraini
government to decide. 

Bahrain has done well in recent years to consolidate its banking system and
reduce the number of small institutions that are no longer viable. 

The Central Bank of Bahrain’s Licensing Directory shows 85 authorised
institutions although some of these, such as Bank ABC and GIB, hold more than
one licence. The Central Bank issues separate licences for retail and wholesale
activities and for conventional and Islamic operations.

The 85 include seven Bahraini institutions that are under administration or
liquidation. They also include some, such as SICO, that are investment banks
rather than commercial banks, and others, such as the housing bank Eskan, that
are not focused on purely commercial activities. 

If we exclude Ahli United and KFH, a merger of NBB and BBK would leave nine
active commercial banking groups in Bahrain.

Bahrain’s role as a regional platform from which banks could access other, less
receptive, countries ended long ago.

Saudi Arabia is encouraging foreign banks to be active in the kingdom (though
the Saudi central bank remains sparing in its issuance of new branch licences),
and both Abu Dhabi and Dubai have provided easy access to their wholesale
markets through international centres that are ringfenced from long-standing –
and slow-moving – regulatory and legal systems. 

Yet Bahrain has retained its reputation as having a well-regulated banking
system, led by a central bank that stays abreast of international standards,
including those relating to financial crime, while encouraging innovation. 

The most recent bank to be authorised, Singapore Gulf Bank, is wholly digital
and has Singapore’s Whampoa Group and Bahrain’s sovereign wealth fund as its
leading shareholders. 

Bahrain’s economy and its population may be small in relation to others in the
region, but it deserves strong, large banks, both conventional and Islamic, that
are rooted in domestic business but capable of projecting themselves overseas. 

Let us hope that the NBB-BBK merger moves forward, and that Al Salam is able to
make a success of its acquisition of KFH’s Bahrain subsidiary.

Andrew Cunningham writes and consults on risk and governance in Middle East and
sharia-compliant banking systems.


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