Dubai: Solid funding, high liquidity and capital positions supported by increased government spending is expected to shore up the asset quality and profitability of Bahrain’s retail banking sector, according to analysts from rating agency Moody’s.
The rating agency has recently changed its outlook on Bahrain’s retail banking system to stable from negative. This reflects banks’ solid funding base and capital buffers, and an economic recovery driven by increased government spending and construction activity that will support banks’ profitability and asset quality.
“We have changed our outlook on Bahrain’s retail banking system to stable from negative. The outlook change reflects the banks’ solid funding, liquidity and capital positions, in addition to our expectation of further economic recovery, fuelled by increased government spending, which will shore-up banks’ profitability and asset quality,” said Khalid Howladar, Vice President-Senior Credit Officer at Moody’s.
Moody’s expect real non-oil GDP to strengthen to 3.8 per cent in 2014 (from 3 per cent in 2013) driven by stronger activity in the construction industry amid high government spending, robust manufacturing activity and the ongoing recovery in tourism and the property market. As most bank lending in Bahrain is directed to the non-oil economy, this expansion is expected to translate into nominal, domestic credit growth of 7 per cent to 8 per cent.
“We expect stable asset quality for the system, with non-performing loans (NPLs) remaining around 6 per cent of gross loans over the outlook period compared to 6.2 per cent in 2013 as the domestic economy strengthens and the banks diversify into higher-growth GCC countries (with estimated that 40 to 45 per cent of loans are granted to entities outside Bahrain). However, asset quality metrics are unlikely to improve materially, as current NPLs are concentrated with a few large, troubled borrowers,” said Christos Theofilou, Assistant Vice President — Analyst at Moody’s.
Bahraini banks continue to exhibit sound funding and liquidity profiles. Deposits accounted for 76 per cent of non-equity funding as of end-December 2013, and liquid assets totalling 34 per cent of total assets as of year-end 2013.
“Following a strong earnings recovery in 2013, we estimate that Bahraini banks will record pre-provision and bottom-line profits of around 1.9 per cent and 1.4 per cent of average assets, respectively, over the outlook period. The stable profitability will reflect in moderate loan growth that will help support interest and non-interest income, countered by the highly competitive and low-interest-rate environment; stringent operating expense control and stable provisioning expenses, at around 0.8 per cent of gross loans,” Theofilou said.
Despite Bahrain’s demonstrated commitment to provide support to troubled retail banks in case of need, fiscal pressure from increased government spending could reduce the authorities’ capacity to provide such support, thus translating into lower systemic support uplift for the rated banks over the outlook period.
“Our stable banking system outlook is in line with the stable outlook on most banks’ stand-alone ratings and reflects the system’s stable credit fundamentals. Our negative outlook on most retail banks’ deposit ratings reflects the negative outlook on the Bahraini government bond rating and the sovereign’s weakening fiscal position to provide support,” Khalid Howladar said.
Moody’s expect the problem loan-to-gross loan (NPLs) ratio of the eight largest Bahraini banks to remain stable at around 6 per cent over the outlook. We expect the formation of new NPLs to decline against the background of increased growth in the domestic non-oil economy, favourable trends in the real estate market, and the banks’ regional diversification in benign GCC economies. However, the concentration of current NPLs around a few large, troubled borrowers (from which we do not expect any major recoveries) will likely keep overall NPLs at current elevated levels, absent stronger loan growth.
