BMI View: We expect the number of mergers and acquisitions in Bahrain to increase from this year onward as consolidation in the financial services and insurance industries becomes a key trend. While this will strengthen growth in these sectors, escalating competition from the rest of the Gulf means that Bahrain will not regain its position as the region's leading financial centre.
We expect industry consolidation to be one of the key trends of the Bahraini economy over the rest of the decade. The historical fragmentation of several industries - most notably banking and insurance - has tended to hamper growth opportunities, particularly when combined with the constraints set by Bahrain's small population base. Over the past few years, new pressures have been added by the gradual erosion of Bahrain's regional competitive advantage in the financial services industry, on the back of the country's continuing political troubles and increasingly fierce competition from the rest of the Gulf Cooperation Council (GCC). These factors, added to the need for scale in order to keep up with regional rivals, will in our view prompt a rise in the number of Bahraini mergers and acquisitions (M&A) from this year onward.
Highly Fragmented Industries
Bahrain's banking sector remains split between a high number of small and medium-sized players, with a total of 29 domestic retail banks and 74 wholesale banks covering a population of approximately 1.3mn people. Even the most sizeable Bahraini banks remain small compared to their GCC peers: Ahli United Bank (AUB), the largest-lender by assets, had total assets of USD29.9bn in 2012, compared to USD100.8bn for Qatar National Bank and USD83.9bn for the UAE's Emirates NBD. Bahrain's Islamic banks are for the most part even smaller than their conventional competitors, with average assets of just USD4.0bn in 2010.
| Competing With Giants |
|GCC - Largest 20 Banks By Assets, USDbn|
The position of the Bahraini retail banking sector is sound, and we expect lending opportunities to improve over the coming quarters as state outlays on large infrastructure projects pick up (see 'Better Lending Opportunities Over 2014', March 19). However, Bahrain's smaller banks will be poorly placed to benefit from this trend in our view, given their limited capital bases, weaker brands, and difficulties in differentiating themselves. These same factors limit their ability to expand in the rest of the region, even as an increasing number of GCC lenders adopt ambitious regional growth strategies.
| More Than 100 Firms... |
|Bahrain - Insurance Sector|
A similar fragmentation is found in the insurance sector, which consisted of 161 firms in 2012, with an average of just 10 employees each. Bahrain has an insurance penetration rate of 2.1%, double that of the broader GCC (although this remains low by global standards). Yet the domestic insurance market is one of the smallest in the region in absolute terms, with total gross premiums written amounting to just USD634.1mn in 2012. While our Insurance research team sees this rising to USD947.2mn by 2018, the Bahraini market would remain modest compared to the rest of the Gulf (see chart below).
| ... Sharing A Small Pie |
|MENA Insurance Sector - Total Gross Premiums Written, USDbn|
The Bahraini insurance industry is largely lacking in pricing power and (with some exceptions) unable to achieve regional economies of scale, innovate, or build meaningful risk pools. The unrest that began in early 2011 led to an increase in claims. Some companies appear to have suffered from further sharp rises in claims through 2012 and 2013 as well. For many companies, investment profits have been unimpressive. The non-life companies are vulnerable to price competition, particularly in basic lines such as motor vehicle insurance and property. Data from the regulator indicates that several of the larger local companies have lost market share to foreign groups over the last few years.
Consolidation Underway At Last
The Central Bank of Bahrain (CBB) has been a key proponent of consolidation since the financial crisis, encouraging mergers between smaller banks in order to create stronger and better-capitalised lenders. Yet the pace of M&A has long been constrained by the dominance of the family-based shareholding structure in the Gulf. Family conglomerates are the major shareholders of many banking and insurance firms and are often reluctant to cede controlling positions, leading to large valuation disparities when negotiating for a deal.
That said, momentum towards consolidation appears to be picking up, notably in the banking sector. The merger of three Islamic banks resulted in the launch of Ibdar Bank in December 2013, with USD360mn in assets. Al Salam Bank finalised a merger deal with BMI Bank in February 2014, creating Bahrain's fourth-largest commercial bank. AUB was recently reported to be evaluating a sale or a merger with a rival bank in the GCC - an important development given its status as Bahrain's largest lender.
The telecoms sector also saw a large deal in April, with Bahraini operator Kalaam Telecom completing the acquisition of 100% of Lightspeed Communications, a subsidiary of Jordan Telecom. The deal makes Kalaam the second-biggest fixed broadband service provider in Bahrain, doubling its annual revenues and taking its customer base in the corporate segment to more than 4,000 businesses, equivalent to 17% of the corporate market. Our Telecoms research team expects the acquisition to boost competition in Bahrain's fixed broadband market, which is presently dominated by incumbent operator Batelco (see 'Consolidation Bodes Well For Competition', April 17).
Decline In Bahrain's Comparative Advantage Inevitable
Given the increasingly dynamic competition faced by Bahraini companies, we believe that the country will not regain its former status as the region's leading financial centre. Bahrain's historical position as the regional hub for Islamic finance is already under threat from Dubai, which announced in 2013 that it would seek to become the global capital of the Islamic economy - although we retain our long-held view that Islamic banking will not evolve into an integrated global financial system (see 'Islamic Banking: New Markets To Emerge', January 21). In conventional banking, Abu Dhabi, Qatar and Saudi Arabia are gradually eroding the status of Dubai and Bahrain.
At the same time, Bahrain's political impasse - a situation we see persisting over the year - has adversely affected the country's investment profile (see 'End To Political Impasse Looking Ever More Distant', January 10). We also believe that Manama will have little option but to introduce new taxes over the coming years, given the government's weak medium-term fiscal prospects. In that context, while rising consolidation will improve Bahraini firms' capacity to fight off rivals in the years ahead, the country will still find itself increasingly at a disadvantage over the longer term.