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Bahrain's Bank ABC focuses on fees, eyes new markets for digital bank

Gulf banks face a tough year and the pandemic is spurring lenders to introduce digital services more rapidly, a top executive at Bahrain's Bank ABC told S&P Global Market Intelligence.

Arab Banking Corp. (BSC), which brands itself Bank ABC and mostly lends to corporations, has subsidiaries in Brazil, Algeria, Egypt, Jordan, Tunisia and the U.K. and also owns payment processing firm AFS, along with digital bank Ila, which it may roll out to new geographies where it does not yet operate.

ABC swung to a net loss in the first nine months of 2020 as net interest income slumped and its credit loss expenses more than quadrupled.

"2021 is going to be a very challenging year for financial services. It's not going to be an easy ride," said ABC Deputy CEO Sael al-Waary, predicting his bank's net interest income would decline this year.

To compensate, ABC and other banks will try to increase their fee and commission revenue. That strategy is partly the motivation for ABC, which had consolidated assets of $29.5 billion as of Sept. 30, to accelerate its plans to digitize its operations and expand its retail banking division.

Digitization push

"Instead of investing [over] five years I went to my board and said, 'I want to invest my total digitizing program [over] the next 18 months,'" said Al Waary. "The whole dynamics of the business model is changing. We're still a wholesale bank, but through our digital [platform] we're going to be focusing more on the consumer through our MENA subsidiaries."

In November 2019, ABC launched its digital mobile-only bank, Ila, in Bahrain. Ila's customer base is expanding 23% month over month, said Al Waary. Ila services will launch in Jordan in 2021 before expanding to Egypt, and will start offering credit cards and loans to Bahraini customers from March.

The executive said ABC wants to roll out Ila in MENA markets where it has a presence, making it a regional retail mobile bank without branches. It could also launch in MENA countries where ABC does not yet have operations, he said.

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ABC's loan book totaled $14.9 billion as of Sept 30, 2020, down from $16.5 billion at 2019-end. Its lending is diversified, with Brazil accounting for 30%, the GCC 30%, other countries in the Middle East and North Africa 15% and the remainder in Europe, Asia and North America, according to S&P Global Ratings, which has a stable rating on the bank.

Most of ABC's lending is short-term trade finance. S&P Global Ratings highlighted the bank's resilient performance in the face of tough domestic conditions, strong capitalization and geographic diversification.

Pandemic impact

The experience of 2020 has affected its corporate lending, Al Waary said.

"We had to be extremely cautious ... but you cannot be a banker and not take risk," he said. "I'm looking to grow my volume of lending. MENA is probably our best market — Saudi Arabia, the UAE, Egypt, Algeria."

He acknowledged that the Gulf's real estate, hospitality and retail sectors are under "deep pressure," and that ABC is not immune but that it has to be part of the community.

"We cannot say 'No, you have to pay.' So, we're working very closely with companies to help them reschedule," he said. "We work closely with our regulators."

In response to COVID-19, Bahrain's central bank urged banks to allow borrowers to defer repayments for six months. This helped the banking sector's nonperforming loan ratio fall to 4.6% as of Sept. 30, 2020, from 5.2% a year earlier, according to central bank data cited by Bahrain's Sico Bank.

Bahrain's biggest banks say it is very hard to say what loan quality is like due to the deferrals, said Sumaya Aljazeeri, a senior investment research analyst at Sico Bank.

"Banks are being conservative in taking provisions," Aljazeeri said. "Any loan quality deterioration will probably only become noticeable in the second half of 2021 — for now, there's still some flexibility in terms of deferment."

Al Waary declined to quantify the percentage of ABC's loans that had been deferred, but said it was "very minimal." ABC's credit loss expenses more than quadrupled to $234 million in the first nine months of 2020, largely as a result of its exposure to now-collapsed NMC Health.

Expansion in Egypt

Libya's central bank owns 59.4% of ABC, while Kuwait's sovereign wealth fund holds 29.7%. ABC in January agreed to buy Lebanese lender Blom Bank's Egyptian subsidiary for $427 million and is now awaiting regulatory approval to complete the purchase.

Al Waary expects this to conclude by the end of March, with ABC then appointing consultants to help integrate the ex-Blom unit into its existing Egyptian operations, which includes 28 branches, in a process he predicts will take eight to 12 months.

"The guidelines for an acquisition for us is that it's a bank we can transform," said Al Waary. He said prospective targets must derive at least 30% of their revenue from retail banking.

"So Blom Bank ticks all the boxes for us. Egypt is a strong market. We want to be stronger in Egypt and increase our market share. Don't underestimate the economy of Egypt."

ABC made a loss attributable to the parent company of $56 million for the nine months to Sept. 30, 2020, versus a profit of $161 million in the prior-year period.

"[Bahraini] banks' profits have been impacted by declines in core income and higher provisioning," Sico's Aljazeeri said, noting this was largely due to lower interest rates, fee limits imposed by the regulator and conservative provisioning in response to the pandemic.