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Downgraded Bahrain banks to find funding expensive

Moody’s links bank ratings and outlook to recent sovereign downgrade

Gulf News

Dubai: Rating agency Moody’s Investors Service has downgraded four Bahraini banks in line with its recent downgrade of the Government of Bahrain’s issuer rating to B2 from B1 with negative outlook.

In its latest rating action, the rating agency downgraded the long-term local currency deposit ratings of Bank of Bahrain and Kuwait (BBK) to B2 from B1, and National Bank of Bahrain (NBB).

At the same time, Moody’s has downgraded the long-term local currency issuer ratings of Bahrain Islamic Bank (BISB) and Khaleeji Commercial Bank (KHCB) from B1 to B2.

The outlook on the long-term deposit and issuer ratings for all banks remains negative in line with the negative outlook assigned to Bahrain’s B2 issuer rating.

The rating agency has also downgraded to B3 from B2 the long-term foreign currency deposit ratings of BBK and NBB and long-term foreign currency issuer ratings of Bahrain Islamic Bank (BISB) and Khaleeji Commercial Bank (KHCB), which is the same level as the country ceiling for foreign currency deposits.

Despite the downgrade, Moody’s analysts expect the funding profiles of Bahraini banks to remain sound, supported by a low loans-to-deposits ratio of 82 per cent in December 2017 and low reliance on confidence sensitive market funding.

Moody’s notes that the rating actions on the banks reflect the government’s reduced capacity to support the country’s banks in the event the need arises.

“Our outlook for Bahraini banks remains negative, reflecting our view that, despite a rise in oil prices, the government’s budget deficit will oblige it to constrain spending, which will moderate growth in the non-oil economy. Higher borrowing costs due to rising interest rates, and reduced subsidies will weigh on corporate and household income, putting mild pressure on loan quality. Profitability will decline slightly as new problem loans increase provisions. Bahraini banks’ sound liquidity and capital will moderate the impact of slower growth,” Christos Theofilou, a senior analyst at Moody’s, wrote in a note ahead of the latest rating action.

Sovereign link

Although the Bahraini banking system remains relatively with strong capital ratios, high profitability and robust liquidity, Moody’s said that the extensive interconnectedness between the banks’ balance sheets and sovereign credit risk, owing to the banks’ high exposures to government securities, is a key driver for the latest rating action.

The Bahraini government has been running a budget deficit since 2009 — at 15 per cent of GDP for 2017 and estimated at 11 per cent of GDP for 2018. This has been largely financed through borrowings from banks as well as international public debt issuances.

“Despite a rise in oil prices, the government’s budget deficit will oblige it to constrain spending, which will moderate growth in the non-oil economy,” said Ashraf Madani, a vice-president and senior analyst at Moody’s, in a recent analysis of Bahraini banking system.

“Higher borrowing costs due to rising interest rates, and reduced subsidies will weigh on corporate and household income, putting mild pressure on loan quality.”

Analysts said the key driver for the rating downgrade is a further rise in Bahrain’s external and government liquidity risks to particularly elevated levels, constraining access to market financing to a greater extent than Moody’s previously envisaged.

Although there has been a slight improvement in Bahrain’s financial metrics driven by a rebound in net foreign assets of the central bank in June, reserves remain precariously low.

CBB’s foreign assets rose by $398 million (Dh1.46 billion) to a total of $2.2 billion in June, which covers just about one month’s imports, is seen as inadequate to support its pegged currency.

Although the recent pledge of support by the GCC to Bahrain has cooled sovereign credit spreads that deteriorated in the last week of June, analysts believe that going forward such supports are likely to become explicit and conditional.

 

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