In view of the expected weakening in the financial metrics of rated Bahraini banks within the context of weaker regional economies, the fundamental credit outlook on the Bahraini banking sector is negative, says Moody's Investors Service in its new Banking System Outlook on the country.
Moody's outlook for the Bahraini banking system expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. For the most part, these expectations are already incorporated in current bank ratings.
"The negative medium-term credit outlook for the Bahraini banking system reflects Moody's expectation that the difficult credit and business conditions will continue over the next few months. This expectation is driven by the ongoing economic slowdown within the Gulf Co-operation Council (GCC) region, which -- although less severe than in other parts of the world -- is exerting pressure on asset prices and business volumes. The negative outlook is also driven by the more challenging wholesale funding conditions in the GCC within the context of the global financial crisis and consequent risk repricing," says George Chrysaphinis, a Moody's Vice President/Senior Analyst and author of these reports.
Also reflected in the negative outlook is the anticipated deterioration in at least some aspects of Bahraini banks' franchises and risk profiles, although this does not necessarily mean that ratings will be downgraded as a result. Moody's primary focus will be on the likely increase in non-performing loans, with construction and real estate exposures being an area of particular concern.
More positively, Moody's says that the ample capital levels of the rated Bahraini retail and wholesale banks means that they are able to absorb credit losses and that it is unlikely that additional capital will be required. "However, Moody's notes that declines in asset prices have exerted pressure on the capitalisation metrics of some wholesale banks that have significant proprietary investment portfolios," adds Mr. Chrysaphinis.
Moreover, Moody's notes that the retail banks' franchise dynamics are unlikely to be materially affected by the ongoing economic slowdown, given their focus on bilateral corporate lending and retail finance and their solid deposit funding profiles. The rating agency cautions that wholesale banks, by contrast, do face significant franchise challenges because of the challenging wholesale funding conditions.
Another positive factor is the relative robustness of Bahrain's regulatory and supervisory regime in the face of the global financial crisis. However, Moody's highlights that tougher sector concentration and liquidity risk management regulations have only recently been introduced.
Moody's notes the issue of systemic banking risk in Bahrain given the large size of the sector relative to the economy. The stability of the system resides in the clear distinction between the retail and wholesale sectors and in the fairly robust regulatory and supervisory environment. The rating agency recognises that wholesale banking, which also includes investment banks, carries more risk, but that bank failures can be isolated because wholesale banks do not form part of the domestic payments system.
However, Moody's notes that links do remain between the retail and wholesale banking sectors, including common sources for international funding, exposure to the regional real estate sector and participation in the interbank markets. "Circumstances that could lead to a systemic crisis include: (i) the failure of one of the larger wholesale banks to which several Bahraini banks could be exposed; or (ii) the failure of one or more wholesale banks because of risky real estate exposures that could lead to a crisis in confidence, which would in turn also affect retail banks with less risky exposures to the sector," explains Mr. Chrysaphinis.