Moody’s downgrades two Bahraini banks’ supported ratings, stress level “modest”

Moody's Investors Service has downgraded the supported ratings of two Bahraini banks – National Bank of Bahrain BSC's (NBB) long-term local currency deposit rating was downgraded by one notch to A2, while BBK BSC's local and foreign currency deposit ratings were similarly downgraded by one notch to A3/Prime-2 and its senior and subordinated debt ratings to A3 and Baa1, respectively. All ratings now have a ‘stable’ outlook.
These downgrades follow Moody's downward reassessment of the Bahraini government's ability to provide systemic support to the domestic banking sector, but were not driven by any reassessment of their standalone financial strength. Accordingly, their bank financial strength ratings (BFSRs) have been affirmed.
Consistent with the analytical criteria specified in a Special Comment earlier this year and given Bahrain's current situation and future prospects, Moody's has changed the systemic support input for Bahraini retail banks' ratings to A1 from the Aa2 local currency deposit ceiling. At the A1 level, the supporting entity rating for Bahraini retail banks generates a lower rating uplift of just two notches for NBB and BBK, rather than the three notches prior to this adjustment and this has resulted in the downgrade of the two banks' supported ratings.
Moody's regards the systemic importance of the Bahraini domestic banking system as high in terms of the ratio of banking assets to GDP of about 230%, which inevitably weighs on the bank's ability to support the entire sector. In this assessment Moody's excludes the much larger Bahraini wholesale banking sector, which does not form part of the domestic banking system and for which no systemic support is implied. The relatively high proportion of retail bank foreign currency obligations, relative to GDP are another constraint on the Bahraini government's ability to provide effective systemic support.
Conversely, Moody's considers that the level of stress in the Bahraini retail banking system, although increased relative to previous years, remains relatively modest. This assessment factors the strong starting position of rated Bahraini retail banks in terms of capital, profits and liquidity and Moody's assumptions for a moderate increase in non-performing loans, within the context of a shallow (relative to most European economies) economic slowdown.
The political and historical evidence in favour of assessing Bahrain as a highly supportive banking framework for retail banks is strong. Over the past few years, even small private sector retail banks have been bailed out, though such incidents have been rare. In Moody's opinion, the attitude of the Bahraini government to supporting domestic retail banks has not changed and is unlikely to change in the foreseeable future.
The A1 systemic support input for Bahraini retail banks is one notch above the A2 local currency government debt rating. The uplift reflects Moody's view that the risk of a system-wide banking crisis is moderate-to-low and that the likelihood of the government "ring-fencing" its own fiscal position from the banking system is also low.
Although Moody's expects Bahraini banks' asset quality metrics to continue to deteriorate over the next few months — as a result of falling asset prices and the more
challenging economic conditions across the Gulf Cooperation Council states — Moody's also recognises that Bahraini banks maintain very strong capital levels and adequate profitability that can absorb growing loan losses. This will help the banks sustain their overall financial strength.
Headquartered in Manama, National Bank of Bahrain reported total assets of BHD2.03 bln (US$5.39 bln) as at September 2009. BBK reported total assets of BHD1.93 bln (US$5.10 bln) as at September 2009.