The outlook on Bahrain’s retail banking system remains negative, reflecting the fragile political situation and operating environment in the country, leading to slow economic growth prospects and heightened downside risks over a 12-18 month period, says Moody’s Investors Service.
The credit rating agency (CRA) says that the unstable conditions in Bahrain at the moment will in turn weigh on retail banks’ domestic asset quality and profitability metrics, although systemic risks will be mitigated by banks’ healthy liquidity and relatively strong capital positions.
Moody’s central scenario in its ‘Banking System Outlook: Bahrain’ report assumes real gross domestic product (GDP) growth of around 3.2% for 2012, well below the 5.9% average growth recorded between 2000-10. Amid the context of prevailing social unrest, the CRA expects private sector confidence, investment appetite and foreign direct investment to remain low over the outlook period, leading to weak business growth prospects for banks.
In Moody’s view, a resurgence of large scale protests and/or street violence remains a downside risk, which would be detrimental to the already fragile market confidence towards Bahrain and negatively impact Bahrain’s economy and banking system.
Aggregate non-performing loans (NPLs) for the largest retail banks will likely exceed 8% of gross loans by end-2012, from around 7.5% at end-2011. Moody’s says that areas particularly at risk from weak loan performance are the troubled real-estate sector and small and mid-sized enterprises (SMEs) in cyclical industries like tourism and retail trade, which account for around 21% of the country’s GDP. These industries contracted over the first nine months of 2011, and Moody’s expects that the on-going social unrest will likely prevent a recovery to pre-crisis levels over the next 12-18 months.
Profitability will likely decrease slightly in 2012 from levels achieved in 2011. Pre-provision income to average risk-weighted assets (RWAs) was 2.0% and net income to average RWAs 1.1%, as at the end of December 2011. While lower net interest margins and higher operating expenses will likely suppress net profits, Moody’s expects that the banks will continue to have an adequate earnings capacity to absorb elevated levels of provisioning expenses.
Despite weakening asset quality and profitability, Moody’s considers that systemic risks will be mitigated by Bahraini banks’ healthy liquidity and relatively strong capital positions.
Moody’s report focuses on the developments and trends affecting the Bahraini local commercial sector (known as retail). The offshore banks (known as wholesale) are characterised by limited participation in the domestic banking system and their domestic assets account for less than 10% of total assets. Quoted figures, unless stated otherwise, are for the seven largest retail banks in Bahrain.
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