“Economic growth has been boosted by a resumption of oil production and government spending, with Fitch estimating a pick-up in economic growth to 5.5% in 2013. Nevertheless, consecutive fiscal deficits in recent years have undermined Bahrain’s public finances, with debt-to-GDP expected to rise to 46.5% by end-2014. Bahrain is therefore highly dependent on subsidies from its Gulf Cooperation Council (GCC) neighbours to support government spending and, indirectly, banks’ financing of government-sponsored projects.”
Fitch also notes that the full extent of the reputational impact of the social unrest on Bahrain as a stable regional financial centre remains to be seen.
Fitch does not expect a material deterioration in asset quality in the near term; therefore, pre-impairment operating profit should continue to easily absorb impairment charges. Nevertheless, event risk remains, given the banks’ concentrated loan books, as evidenced by the recent rise of National Bank of Bahrain’s non-performing loan (NPL) ratio to 7.6% from 1.8% almost entirely driven by one large, sub-standard real estate exposure.
Bahraini banks maintain adequately liquid balance sheets in Fitch’s view. The average loans/deposits ratio across Fitch-rated Bahraini banks reduced to 75% at end-1H13, with most being net placers in the interbank market.
Fitch Core Capital ratios have noticeably improved in recent years, driven by retained earnings, a reduction in risk weighted assets and in some cases no dividend payments. At end-1H13, the average Fitch Core Capital ratio was comfortable at 18.6%. Nevertheless, there is strong variance between banks, and Fitch believes capitalization at BBK and Ahli United Bank BSC may need boosting in the medium term.
Fitch does not expect to change any Issuer Default Ratings (IDR) following the reassessment of the likelihood of support at any bank. Any IDR upgrade would reflect a similar action on the Viability Rating (VR); this will prove difficult in the near term when considering the challenging political backdrop and operating environment in Bahrain and elsewhere in the MENA region.
“The VRs could be downgraded if the socio-political unrest were to materially deteriorate (which Fitch does not expect), or if there were a significant and sustained deterioration in asset quality across the sector, especially if it were to impact the banks’ otherwise healthy capital levels. Nevertheless, a VR downgrade would only impact the IDRs of Arab Banking Corporation.”