Apr 17, 2013
Limassol, April 11th 2013 - Moody's Investors Service has today downgraded by one notch the deposit ratings of National Bank of Bahrain (NBB) to Baa2 from Baa1 and the standalone bank financial strength rating (BFSR) to D+, equivalent to a baseline credit assessment (BCA) of baa3, from C-/ baa2. Moody's also affirmed NBB's Prime-2 short-term deposit ratings. All ratings now carry a stable outlook.
The rating actions reflect (1) a weakening in NBB's asset quality and provisioning coverage; (2) the challenging domestic operating environment, which will exert further pressure on NBB's financial metrics; and (3) NBB's recent investment in Bahrain Islamic Bank (BIsB; deposits Ba3 negative, BFSR E+/ BCA b3 negative).
The outlook on NBB's ratings is stable, as the operating environment and asset quality risks outlined above are counterbalanced by (1) a healthyloss-absorption capacity; and (2) solid liquidity and funding profile.
--- WEAKENING OF ASSET QUALITY
Moody's says that the primary rating driver of the downgrade is the weakening in NBB's asset quality, with non-performing loans (NPLs) to gross loans increasing to 7.6% as of year-end 2012, from 1.8% as of year-end 2011, primarily due to one problematic corporate exposure in the construction sector. Consequently, NBB's provisioning coverage has weakened, with loan-loss reserves accounting for 40% of NPLs as of year-end 2012, from 104% as of year-end 2011. While NBB notes that it maintains collateral against NPLs, Moody's considers that there is a high risk of further provisioning requirements as (1) the realisation of the real-estate collateral (related to the aforementioned corporate exposure) is uncertain because the project has not yet been completed, and (2) the Bahraini real-estate market remains under pressure.
The significant increase in NPL levels, which stems from a single exposure, also highlights the risks surrounding NBB's high asset concentrations, with its top 20 exposures accounting for over 200% of Tier 1 capital as of year-end 2012. At the same time, a high level of restructured loans within NBB's loan book (at 4.7% of gross loans during 2012) presents a further potential risk to NBB's asset quality if operating conditions do not improve.
--- CHALLENGING OPERATING ENVIRONMENT
Despite the benefits of high government spending, Bahraini banks (including NBB) are faced with a challenging operating environment, characterised by social unrest, fragile consumer confidence and a troubled real-estate sector. As a result, Moody's expects economic growth to remain well below pre-crisis growth levels, while a resurgence of large-scale protests also remains a key downside event risk for the Bahraini economy and banking system. Within this context, Moody's expects further pressure on NBB's asset quality, profitability and business-growth potential.
--- INVESTMENT IN BIsB
The downgrade also takes into account downside risks related to NBB's recent 25.8% stake in BIsB, an investment that makes up 6% of NBB's Tier 1 capital. BIsB has been loss-making for the past four years and continues to generate losses; as such, Moody's believes that any further losses by BIsB would weigh on NBB's own financial performance. In addition, NBB may need to contribute to any potential capital injection that BIsB might require, which Moody's estimates could take the total investment to around 10% of NBB's Tier 1 capital.
The outlook on NBB's ratings is stable, as the operating environment and asset quality risks outlined above are counterbalanced by (1) a healthy loss-absorption capacity, with a December 2012 Tier 1 capital of 23.8% (post-dividend) and the pre-provision income-to-total average risk-weighted assets ratio of 5.6%; and (2) solid liquidity and funding profile.
NBB's deposit rating of Baa2 continues to incorporate one notch of systemic support uplift, reflecting Moody's assessment of a very highprobability of systemic support from Bahrain (rated Baa1).
WHAT COULD MOVE THE RATINGS UP/DOWN
Negative rating pressure could be exerted on the ratings if the ongoing weaknesses in the Bahraini operating environment translate into higher provisioning expenses and asset-quality deterioration that exceeds Moody's expectations.
Given the challenging operating conditions in Bahrain, there is currently limited upward rating pressure. In the longer term, the ratings may be upgraded following (1) evidence of economic resilience in Bahrain and of a recovery in the currently weak real-estate sector; and (2) a material improvement in NBB's asset-quality metrics and a strengthening in its loan-loss provisioning coverage.
Re-disseminated by The Asian Banker