By Hadeel Al Sayegh and Saeed Azhar
DUBAI, Aug 3 (Reuters) - Bahrain's Ithmaar Holding ITHMR.BH is exploring the sale of its 25.4 percent stake in BBK BSC BBKB.BH , which has operations in Bahrain and Kuwait, India and Dubai, sources familiar with the matter said.
The stake is valued at about $250 million and may only be offered to strategic investors, one of the sources told Reuters.
Ithmaar also owns convertible bonds sold by BBK last year, which would make the deal size even higher, one of the sources said.
BBK sold 100 million Bahraini dinars ($265.20 million) worth of perpetual convertible capital securities last year to existing shareholders.
Ithmaar, an Islamic retail bank, is working with an investment bank on the transaction and has also talked to other banks, the sources said.
Ithmaar and BBK declined to comment.
The sale process is complex because the Central Bank of Bahrain is unlikely to allow private equity firms to bid for the stake, while banks will weigh it carefully because having minority stakes is seen as punitive for capital under Basel 3, the sources said.
Interest from a local financial institution in the stake could raise the possibility of a merger, but so far there is no indication of this.
Mergers among Bahraini lenders have been encouraged by the country's central bank. There are around 29 retail banks and 73 wholesale banks serving a population of around 1.4 million, according to the central bank.
In other recent M&A activity in the banking sector, Kuwait Finance House (KFH) is looking to merge with Bahrain's Ahli United Bank, Kuwait's biggest Islamic lender said last month.
GFH Financial Group said in December last year it hoped to largely complete the acquisition of Bahrain's Bank Al Khair in the first quarter of this year and is at an advanced stage of exploring a merger with another Bahraini bank. Ithmaar stake sale plan also comes as lenders grapple with a slowdown in Bahrain's economy, which has been hit hard by low oil prices, and reduced government spending.
The country's financial sector, which is a major driver for its non-oil economy, is projected to slow to 2.5 percent in 2017-18, from 3.7 percent in 2016, Moody's Investors Service said in a recent report. The overall economy is expected to grow at a slower pace this year compared with 3.1 percent in 2016.
This week Moody's downgraded BBK's local currency deposit and foreign currency senior unsecured debt ratings to B1 from Ba2, saying it reflected the close linkage of the bank's own credit profile to that of the government.
Banks in Bahrain are well capitalised though. BBK BSC has a capital adequacy ratio of 18.48 percent, with a strong market share in the retail banking market.
The Bahraini and Kuwaiti government entities own 50.81 percent of BBK BSC.
($1 = 0.3771 Bahraini dinars) (additional reporting by Tom Arnold; editing by Susan Thomas)