Moody's sees negative pressure on Bahrain banks

Moody's has said the outlook for Bahrain's banking system remains negative due to the impact of the political unrest earlier this year. The ratings agency said the outlook reflected its expectations for fundamental credit conditions in the sector over the next 12-18 months. Christos Theofilou, a Moody's analyst, said in a report: "We believe that the unrest and its ramifications will exert negative pressure on banks' asset-quality performance, and on growth and profitability. "However, systemic risks will be mitigated by the domestic retail banks' healthy liquidity and relatively strong capital positions." The report noted that, for 2011 and 2012, Bahrain will likely register two percent and three percent real GDP growth, respectively, down from 4.5 percent in 2010 and 6-8 percent between 2006-08. Theofilou added: "Given our growth forecasts, asset-quality pressures are likely to increase, particularly for loans originated to the tourism and retail trade sectors where the political unrest has severely disrupted operations. "We also expect the underlying political tension to hamper private-sector investment and constrain the retail banking sector's domestic business growth." The Moody's report said real estate exposure continues to be the primary asset-quality concern within Bahrain's banking system over the next 12-18 months. Recent uprisings will delay recovery in that sector, which is characterised by oversupply and declining rental and sales prices, Moody's added. "As a result of these pressures - and because of subdued business growth prospects - Moody's expects profitability to decline over the outlook horizon," the report said. Theofilou added: "We do not, however, expect asset-quality pressures to develop into a systemic threat for the overall Bahraini retail banking sector, mainly because of the sector's relatively strong capitalisation profile, which provides substantial loss-absorption capacity. "However, whilst Bahraini retail banks exhibit high regulatory ratios, some smaller banks exhibit very weak asset-quality track records," he said. The banking system's liquidity remains adequate, Moody's said, adding that during the unrest, there were no significant deposit outflows and frozen credit lines with international banks were reversed soon after the unrest subsided.