Moody’s downgrades BMI Bahrain Bank’s ratings

Moody's Investors Service has downgraded the local and foreign currency deposit ratings of BMI Bank B.S.C. based in Manama, Bahrain, to Baa3/Prime-3 from Baa2/Prime-2, and its bank financial strength rating (BFSR) to D from D+. The outlook on the D BFSR is negative.
According to Moody's, the rating downgrade reflects BMI's weakened franchise and profitability as it reduces its cross-border syndicated lending activity that still forms a large part of the bank's business mix. This is driven by the much reduced availability of cheap wholesale funding and the weakened financial health of regional borrowers that has led to a marked deterioration in the risk-reward characteristics of this business. Higher levels of credit and liquidity risk have also curtailed the short-to medium-term growth prospects of the bank's niche banking subsidiaries in Africa and in other Middle Eastern markets.
Moody's rating review also assessed BMI's decision to refocus on its small domestic retail and commercial banking business in Bahrain, which had received material capacity investments in recent years. The rating agency acknowledged the soundness of this strategic choice but noted that competition from larger, better established players will also continue to constrain growth and profitability.
Moody's added that its rating action took into account BMI's weak funding structure but also recognised that any immediate liquidity concerns have been alleviated through facilities granted by its major shareholder, BankMuscat (Oman) in late 2008, and thereafter by the running down of the syndicated loan book. Similarly, Moody's has factored the sharp deterioration in the bank's asset quality (with gross non-performing loans rising to 8.1% at the end of 2009, up from 1.8% at the end of 2008), primarily generated by its material exposure to two Saudi groups and a Kuwaiti finance firm.
Moody's said that although current non-performing loans are well provisioned, credit risk remains a major concern and is the prime driver for the negative outlook on BMI's D BFSR. This position incorporates the view that there is potential for further asset quality deterioration over the next few months, given subdued economic growth and reduced access to funding in Bahrain and the Gulf Cooperation Council (GCC), as well as the rapid expansion of real estate lending in recent years.