Limassol: Moody’s Investors Service has assigned first-time Baa2/Prime-2 issuer ratings to Bahrain Development Bank (BDB). The assigned ratings reflect (1) Moody’s assessment of a high probability of support from the government of Bahrain (Baa2 negative), in case of need, given BDB’s 100% government ownership and its franchise as Bahrain’s leading development bank; (2) the elevated level of credit risk the bank faces stemming from its large lending operations to small and medium sized enterprises (SMEs); (3) BDB’s robust capital buffers that provide an ample cushion against potential credit-related losses, reinforced by government guarantees that further reduce the size of these credit losses; and (4) the bank’s wholesale funding dependence and high concentration in its funding.
The negative outlook reflects the negative outlook on Bahrain’s Baa2 sovereign rating.
The primary driver for BDB’s Baa2 issuer ratings is Moody’s assessment of a high probability of support from the government of Bahrain, in case of need. Accordingly, the rating agency has aligned the bank’s rating with the sovereign rating for the following reasons. Firstly, BDB was established to become Bahrain’s leading development financial institution. BDB’s mandate is to promote investment and entrepreneurship in the kingdom with the aim of diversifying the economic base, creating new employment opportunities and contributing to overall socio-economic development within the Kingdom. Secondly, BDB is wholly owned by the government of Bahrain.
BDB’s issuer ratings also capture on a standalone basis the elevated level of credit risk in the bank’s loan book and equity investments. As part of its mandate, the bank provides financing to SMEs and small businesses in the Kingdom (either through loans or equity) with a focus on healthcare, manufacturing and export-oriented industries.
BDB also lends for education and finances the agriculture and fishing sectors. These lending operations to smaller and untested businesses expose the bank to an elevated level of credit risk and high credit-related losses. As of
June 2014, BDB’s non-performing loans to gross loans ratio stood at 11.3%, substantially higher that the 7.2% average for retail banks in Bahrain, according to Moody’s estimates.
BDB’s robust capital buffers provide an ample cushion to absorb potential credit related losses. In addition, credit related losses are partly reduced through government guarantees for certain loan categories. As of June 2014,
BDB reported a high 45.2% Tier 1 ratio, whilst nominal leverage was also low with BDB’s equity at 42.9% of assets.
“BDB’s issuer ratings also capture its wholesale funding dependence as well as the high concentrations in its funding. Excluding equity, term-loans from three regional development funds and bank placements are the main liabilities that fund BDB’s balance sheet. Moody’s generally regards wholesale funding as a less stable funding source than customer, in particular retail, deposits. However, the rating agency also notes that this wholesale funding reliance is a common characteristic of development institutions and believes that BDB’s government ownership mitigates refinancing risk.