Moody's: Bahrain's banking system outlook remains negative
Date: Mar 19, 2013
Categories: Results & Ratings
Limassol, March 18th 2013 - The outlook for Bahrain's banking system remains negative, says Moody's Investors Service in a new report published today. The outlook is unchanged from 2009 and primarily reflects the challenging domestic operating environment, amidst ongoing social unrest, which continues to affect investor confidence and will sustain elevated levels of non-performing loans (NPLs). However, over the outlook period, Moody's also expects that the banks will maintain their healthy funding and capital profiles, supporting the system's financial stability.
The new report, entitled "Banking System Outlook: Bahrain", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
Bahraini banks 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 2013F non-oil GDP growth to slow to around 3.5% from 5% in 2012, which is well below pre-crisis growth levels and one of the lowest growth rates amongst GCC countries. A resurgence of large-scale protests also remains a key downside event risk for the Bahraini economy and banking system over the outlook horizon.
"Despite the benefits of high government spending, we expect that these challenging conditions will weigh on the local banks' asset quality and profitability over our 12-18 month outlook period," says Christos Theofilou a Moody's Assistant Vice President and author of the report.
Moody's expects that NPLs will remain at relatively elevated levels of around 8% of gross loans in 2013 for the eight largest retail banks (FY2012 estimate: 7.5%). These levels exclude the recently restructured loans, which Moody's estimates to amount to a further 3% of gross loans.
"Our NPL expectations largely reflect the ongoing weaknesses in the real-estate sector, where supply continues to exceed demand, and continued political uncertainty in Bahrain, which will delay any robust recovery in the economy and affect private-sector investment decisions. However, we acknowledge that high government spending, will partly mitigate these pressures, along with capitalisation buffers and funding levels that will remain solid over the outlook period," explains Mr. Theofilou.
Over the outlook horizon, Moody's expects that Bahrain's retail banks will continue to exhibit sound funding and liquidity profiles. Bahraini banks are primarily deposit-funded and maintain high levels of liquid assets. While deposits remain highly concentrated to regional governments, they have historically been stable and Moody's expects that this will remain the case over the outlook period.
In terms of profitability, Moody's expects profitability metrics to remain close to the current moderate levels, reflecting: (1) depressed net interest margins, owing to the low interest-rate environment, and high competition in Bahrain, and (2) elevated provisioning expenses, owing to underlying weak asset quality, ounterbalanced by (3) the rating agency's expectation of loan growth of around 10%, driven by government spending, and relatively stringent controls on operating expenses.
Re-disseminated by The Asian Banker