Despite facing challenging macroeconomic headwinds, in addition to illiquidity and limited levels of free-floating shares, Bahrain’s capital markets have been among the best-performing in the GCC in recent years. Indeed, the Bahrain All Share Index (BASI) reached a nine-year high in mid-2019, while the initial public offering (IPO) of a port operator in late 2018 was deemed the most successful listing in a decade. Moreover, Bahrain Bourse (BHB) stakeholders have made steady progress on a series of ambitious reforms and innovations aimed at boosting digital trading and attracting new investment. One of the few exchanges in the GCC to have almost no restrictions on foreign equity ownership, the BHB remains one of the most competitive and well developed in the region. The upcoming acquisition of one of the exchange’s largest listed companies is set to bolster a recent surge in trading activity and share prices, while ongoing efforts to expand and diversify its debt market are expected to support robust near- and mid-term growth.
Structure & Oversight
Originally established as the Bahrain Stock Exchange (BSE) by Decree No. 4 of 1987, the BHB is the national stock exchange. It began operations in 1989 and is a self-regulating organisation licensed by the Central Bank of Bahrain (CBB). The BHB replaced the BSE with the promulgation of Decree No. 60 of 2010, which established the new bourse as a shareholding company.
The BHB comprises an equity market; bond market for conventional and sukuk (Islamic bonds); a Treasury bill market; a real estate investment trust market; a mutual fund market; and an alternative equity board for small companies and start-ups, known as the Bahrain Investment Market. The bourse’s broad profile is also set to include asset classes such as exchange-traded funds and derivatives.
The BHB is responsible for settlements and ownership transfers of domestic joint stock securities, and securities listed on the BHB must be traded through registered brokers. One of the primary competitive advantages of the bourse is its foreign ownership regime. Besides the tourism company Bahrain Family Leisure, which caps ownership by non-GCC nationals at 49%, none of the listed equities have limits on foreign ownership, setting the bourse apart from several of its GCC neighbours, where foreign ownership in many sectors is capped at less than 50%. The BHB also permits trading in both the Bahraini dinar and the US dollar, and is one of the few stock exchanges in the Middle East to do so.
One of the most important recent developments at the BHB was the July 2017 launch of Bahrain Clear, an independent entity licensed by the CBB and operating under the BHB. Bahrain Clear is responsible for establishing, managing and operating all systems for deposits, clearing and settlement of securities transactions, as well as for managing shareholder records, undertaking custodian activities, and providing advisory and technical services for depository, clearing and settlement activities. Bahrain Clear is also tasked with pledging and freezing the shares of listed and non-listed companies, registering members with the Central Depository System for trading, and providing companies with a daily corporate actions package, which includes bonus shares, and stock splits and mergers. Bahrain Clear is working to expand the services of the bourse’s central registry to include the direct distribution of cash dividends to the bank accounts of shareholders, while managing general assemblies and meetings of listed companies.
Speaking at the launch of Bahrain Clear, Sheikh Khalifa bin Ebrahim Al Khalifa, CEO of the BHB said that the establishment of Bahrain Clear will help the bourse enhance and diversify post-trade services, and to provide services in line with those offered in advanced markets. The agency is also expected to improve Bahrain’s capital market classification on international indices, which would help attract more local and regional investment.
Digital Platforms & IPO
Bahrain Clear is playing an important role in modernising BHB activities, most notably with the development of its eIPO platform, which allows subscriptions to IPOs to be carried out online. The platform was deployed in November 2018, in conjunction with an IPO of local port operator APM Terminals, which put up some 18m shares at BD0.66 ($1.75) per share. An important player in the kingdom’s logistics and supply chain sector, APM Terminals operates the multi-purpose Khalifa bin Salman Port, which handles domestic cargo, cruise ship traffic and trans-shipments. The company’s $31.3m offering was 5.4 times oversubscribed, with total institutional and retail demand reaching 97.4m shares worth a combined BD64.3m ($170.6m). It was the kingdom’s most successful IPO in a decade.
“This indicates market confidence in the kingdom and strong demand from international investors for IPOs, especially for companies that operate in unique sectors such as port operations,” Sheikha Sameer Al Zayani, director of listing and disclosure at the BHB, told OBG. “Following the success of the APM Terminals IPO, there are signs that other companies are considering going public over the short term.”
According to the BHB, the eIPO system accounted for 55% of total subscription applications and 90% of the IPO’s total volume. “We initially expected the eIPO platform to capture about 20% of total subscriptions,” Abdulla Abdin, senior director of operations at Bahrain Clear, told OBG.
Digital innovation remains an important priority for the bourse, which inaugurated a new online equity trading platform developed by Mubasher Financial Services in May 2019. The National Bank of Bahrain’s Al Watani TRADE platform allows clients to trade securities directly on the BHB with the use of smart devices. Additionally, the launch of the Khaleeji eTrade platform in March 2019 allows Khaleeji Commercial Bank clients to easily open accounts to trade stocks listed on the BHB. The APM Terminals IPO was the first transport and logistics listing on the BHB, and also the first to be carried out under new listing regulations issued by the CBB. The CBB’s Capital Markets Supervision Directorate regulates most primary and secondary market activity; however, the Resolution No. 11 of 2018 mandated the BHB operate as a self-regulating organisation and clarified the bourse’s role in approving IPOs. “The resolution specifies a clear timeline for the review and approval of an IPO, which was previously somewhat vague,” Sheikha Al Zayani told OBG. “This procedure used to take around one-anda-half to two years to complete. Under the new rules, however, an IPO will be reviewed within a month. I believe this revised timeline will encourage other companies to submit an application.”
As of October 2019 the regulators were finalising new listing rules that will give the BHB greater control over IPO approvals. “The listing rules will clarify timelines and all the previous mandates. We will be providing guidelines that issuers can use as a reference to ensure transparency,” Narjes Jamal, COO of the BHB, told OBG. The new rules are expected to be released in the fourth quarter of 2019.
As of December 2019 there were 44 companies listed on the BHB. Equities are traded across eight separate categories, including commercial banks, investment, insurance, services, hotels and tourism, industrial, closed companies, and non-Bahraini companies. According to statistics from the BHB, the total volume of shares traded annually grew from 1.1bn in 2017 to 1.4bn in 2018, while the total value of traded shares rose from BD211.3m ($560.5m) in 2017 to BD323.8m ($858.9m) in 2018 At the end of the third quarter of 2019 traded volumes stood at 908.7m while the total value of traded shares accounted for BD229.8m ($609.5m). Meanwhile, total market capitalisation grew from BD8.1bn ($21.5bn) at end-2017 to BD8.2bn ($21.8bn) at end-2018 and BD10.1bn ($26.8bn) at end-2019.
Commercial banks dominate the market, accounting for a combined BD467,007 ($1.2m) as of October 19, 2019, or roughly 68% of the total. This was largely owing to the market dominance of Ahli United Bank (AUB), whose 657,121 listed shares equate to BD223,333 ($592,000), or a market share of 32.4%. Following AUB in terms of market share was Al Salam Bank-Bahrain, with BD213,733 ($567,000); GFH Financial Group, with BD53,363 ($142,000); and APM Terminals, with BD51,052 ($135,000).
The bourse remains resilient despite challenging macroeconomic conditions. The BHB was the only exchange in the GCC that recorded growth in trading activity in 2018, according to Kuwait’s KAMCO Investment Company. According to the bourse’s 2018 annual report, the total value of trades rose by 53%, with average daily trading values standing at BD1.3m ($3.4m), while total trading volumes increased by 28%. Market capitalisation rose by 0.6% over the year, while the total number of investors expanded by 17% to 42,998. The BASI gained a modest 0.42% to close the year at 1337.26.
While growth continued strongly into the first half of 2019, the market’s performance was mixed in the last quarter of the year. While the BASI rose by 20.9% over the year to 1610.2 and the total value of traded shares grew by 53% to BD121.7m ($322.8m), total trading volumes fell by 39.2% to 409m. Meanwhile, the total number of transactions decreased by 11% over the same period, from 4729 to 4211. Between October and December 2019, BD82.8m ($219.6m) worth of shares were traded by Bahraini investors, equivalent to some 73.2% of total trades on the exchange, while foreign investors accounted for BD30.4m ($80.6m) of trades, or 26.8% of the total.
Top-Three Listed Companies
According to UAE-headquartered business intelligence provider Zawya, the top-performing company on the BHB in 2018 was Bahrain’s Esterad Investment Company. The company saw its shares increase by 66.7% despite relatively flat income of BD1.7m ($4.5m) and a 16.8% fall in shareholder profit to BD748,793 ($2m) over the first nine months of the year. Its positive performance in 2018 is largely attributable to the sale of 29.7m shares in local company Manarat Investment Holding in December 2018, which caused a temporary price surge near the end of the year.
Arab Banking Corporation (Bank ABC) was the second-best performing stock in 2018, with the value of its shares growing by 45.6%. This was supported by the bank’s improved liquidity, high dividend payout and robust financial performance. Over the year Bank ABC’s net profits rose by 5% to $202m, while return on equity increased by 5.2%. In third place was Bahrain Telecommunications Company, which recorded a 35.9% gain in share values in 2018, following a net loss of BD21.7m ($57.6m) in the last quarter of 2017, which was mainly driven by impairment losses in the company’s Yemen and Jordan investments. Meanwhile, full-year net profit attributable to equity holders rose by 1335% to BD50.1m ($132.9m).
Despite the success of the APM Terminals IPO – which is seen as a milestone in the bourse’s strategy of attracting new issuers from fast-growing economic sectors – trading activity on the BHB remains constrained by low levels of free-floating stock among listed companies. Under current regulations, the mandatory minimum free float for a listed company in Bahrain is set at 10% of the total shares offered; however, some stakeholders report that listed firms often float less than this.
The high concentration of institutional ownership in many Bahraini companies also poses a challenge to future IPOs, with many institutions unwilling to cede control of their companies to shareholders. “We understand there is a liquidity issue, and we have considered increasing the free float to 15%,” Sheikha Al Zayani told OBG. “However, there is no plan currently in place to increase the mandatory minimum beyond 10%. The BHB has put other measures in place to help with the liquidity issue, most notably the establishment of the Bahrain Liquidity Fund.”
An uptrend in average daily traded volumes recorded in recent years has been supported by the Bahrain Liquidity Fund. Launched in June 2016 by Manama-based investment firm SICO Bank, in partnership with the CBB and the BHB, the BD42.5m ($112.7m) fund aims to enhance and deepen Bahraini capital markets. The fund acts as a market maker, with the bank providing two-way quotes on most listed securities and a reasonable spread enabling investors to actively trade their stocks. Its seed investors include Osool Asset Management, Bank of Bahrain and Kuwait, Mumtalakat Holding Company, and the National Bank of Bahrain.
According to SICO Bank, the fund has made a significant impact on BHB operations, with average daily traded values reaching BD1.1m ($2.9m) in 2018, up 75.5% compared to BD626,745 ($1.7m) in 2017.
In January 2019 SICO Bank announced that the fund intervened in fewer deals in 2018, around 22% of average daily traded volumes less than it did in 2017, when interventions amounted to 39% of the total. While SICO Bank reported that block trades flowing through the market can distort the true effect of the fund, it also noted that the BHB’s 30% increase in average daily traded volumes in 2018 is a significant improvement over other GCC markets. While there are plans to introduce additional market makers to the BHB, possibly located outside of Bahrain, no firm timeline has yet been announced.
Mergers & Acquisitions
Another potential growth driver for the BHB is the planned acquisition of AUB by Kuwait Finance House (KFH). In January 2019 KFH announced that was seeking to acquire AUB in a $7bn buyout, which would create the first major cross-border tie-up in the GCC. A due diligence process was completed in September that year. The proposed KFH-AUB merger was approved by Kuwait’s Public Institute for Social Security in August 2019, and conditionally approved by the central bank of Kuwait in the following October; meanwhile, it was awaiting approval from the CBB as of late October 2019. Once the acquisition is complete, KFH will be one of the largest banks regionally and globally, with assets of over $94bn and equities in excess of $10bn. As of late October 2019 AUB share price stood at $0.90, up from $0.68 at the beginning of the year.
Rising competition from other GCC exchanges has put the BHB under pressure in recent years, as companies seek multiple regional listings because of issues of scale and liquidity. Twelve BHB-listed companies are also listed on other GCC exchanges: five – including AUB – are on Boursa Kuwait, five are on the Dubai Financial Market, one on the Muscat Securities Market and one on Nasdaq Dubai. However, some industry experts view the potential cross-listing of KFH as a positive for the BHB.
According to BHB stakeholders, developments in other GCC markets – for example, Saudi Arabia’s inclusion in the MSCI and FTSE Russell Emerging Market indices in 2019 – are set to benefit the broader region, including Bahrain. “We have a lot of crosslisted companies in the GCC and often undertake knowledge exchanges to improve regional practices,” Sheikha Al Zayani told OBG.
Other measures to improve liquidity have focused on building and diversifying the debt market. Activities on the bourse are dominated by equities; however, the kingdom has made notable inroads in developing and launching new debt products. For example, the Treasury Bills Market, an in-demand platform used by banks to manage short-term liquidity, was launched in January 2016.
The debt market expansion is also supported by ongoing efforts to develop a secondary market for fixed-income instruments, most notably with the launch of a new CBB-supported mechanism in January 2015 that allows retail investors direct access to government debt issuances. The first of its kind in the Middle East, the mechanism allows Bahraini and non-Bahraini individuals and institutions to purchase government debt through registered brokers, and to trade bonds on the secondary market. The minimum subscription rate for these purchases is low, at BD500 ($1330), or 500 bonds or sukuk issued at a par value of BD1 ($2.65) each.
Despite efforts to strengthen Bahrain’s debt market, there remains room for improvement. In August 2018 Moody’s Investors Service downgraded Bahrain’s credit rating from “B1” to “B2”, maintaining a negative outlook. Moody’s reported that the kingdom’s ability to issue bonds internationally had become impaired, citing the government’s decision in March 2018 to abandon both a conventional and long-dated sukuk issuance to instead issue a $1bn sukuk at a 7.5-year maturity. Moody’s also noted that in late June 2018 Bahrain’s sovereign credit default swap spreads surpassed the 600-basis-point threshold, a level it had previously only reached during the height of the 2007-08 global financial crisis.
Heading into 2019, the outlook for debt issuance in Bahrain was more positive, supported by a $10bn fiscal injection pledged by its GCC neighbours in late 2018. In February 2019 Bloomberg reported that Bahraini bonds delivered an average return of nearly 5% in the months following the funding programme’s launch, this was underpinned by an ongoing fiscal consolidation programme aimed at diversifying the economy and reducing the budget deficit to zero by 2022 (see Economy chapter).
In May 2019 the CBB moved to issue 10 new Treasury bills valued at BD563m ($1.5bn), offering discount rates of 3.18% to 4.39% for between three and 12 months. The bond market continued on the positive trajectory in August 2019, when the CBB reported that its BD70m ($185.7m), 91-day Treasury bill issuance was 165% oversubscribed. At the end of September that year there were 18 Treasury bill issuances on the BHB valued at $1.7bn, as well as 13 listed bonds and sukuk worth approximately $6bn.
The inclusion of Bahraini sovereign and quasi-sovereign bonds in JP Morgan’s emerging market bond index (EMBI) Global Diversified, EMBI Global (EMBIG), and EURO-EMBIG series in January 2019 is also expected to help boost debt market growth.
Benefitting from lively trading activity, increasing market capitalisation and an expanding debt market, Bahrain’s capital markets are set for a strong performance in 2020. Although illiquidity and sluggish macroeconomic growth continue to pose a challenge, the BHB’s proactive and progressive approach to regulatory reform and digital innovation will help the bourse maintain its competitive edge against a backdrop of rising regional competition. Meanwhile, the success of the APM Terminals IPO is expected to encourage new listings in the coming years, demonstrating sustained confidence in Bahrain’s economic fundamentals and keeping the bourse on track for steady mid-term expansion.