The outlook on Bahrain's retail banking system has been changed to stable from negative based on a solid funding base and capital buffers, as well as an economic recovery driven by increased government spending and construction activity that will benefit banks, Moody's Investors Service said on Monday.
While economic growth will buoy banks' credit fundamentals, Moody's notes that increased government spending also puts pressure on Bahrain's fiscal position, which could affect the capacity of authorities to provide support to financial institutions over the outlook horizon.
Since real non-oil GDP is expected to strengthen to 3.8% in 2014 (from 3.0% in 2013) and given that most bank lending in Bahrain remains directed toward the non-oil economy, Moody's forecasts domestic credit growth of around 7%-8% over the next 12-18 months. Stronger activity in construction, manufacturing and the ongoing recovery in the tourism/property markets will drive the growth in non-oil GDP.
The rating agency said that asset quality will remain stable overall for the system, as the domestic economy strengthens and the banks diversify into higher-growth Gulf Cooperation Council countries, with an estimated 40%-45% of loans granted to entities outside Bahrain. Moody's expects that non-performing loans will remain around 6% of gross loans over the outlook period (December 2013: 6.2%), as current NPLs are still concentrated toward a few large borrowers that are under stress.
The rating agency also expects banks' capital metrics (with an aggregate Tier 1 ratio of around 14.5% as at the end of December 2013) to remain broadly stable and sufficient to absorb losses under its scenario and stress-testing analyses.
Moody's expects that Bahraini banks will continue to exhibit sound deposit-funded and liquidity profiles. Deposits will remain stable over the outlook period, even though the banking system remains highly concentrated toward government deposits. Deposits accounted for 76% of non-equity funding as of end-December 2013, and liquid assets totalled 34% of total assets as of year-end 2013.
However, Moody's said that as a reflection of the government's increased spending in the economy, debt levels have also risen. In addition, limited oil reserves have raised the country's fiscal break-even oil price. Accordingly, this could affect the government's flexibility to absorb oil-price shocks and affect the authorities' capacity to provide support to financial institutions over the outlook period, the rating agency concluded.
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