The escalation of political tension in Bahrain is negative credit for Bahraini banks, several of which have kept their branches closed amid the volatile situation, said a report.

It reinforces fears of prolonged political and economic uncertainty, which is likely to hurt the banks’ financial condition, said an extract from the recent Moody’s Weekly Credit Outlook, published by Moody’s Investors Service, which provides clients with opinions on breaking credit market developments and trends.

The domestic banking sector (composed of 25 conventional and Islamic banks) may face increased asset quality pressures during 2011, as the disruption of normal economic activity hits businesses, the report said.

With tourism flows and commerce naturally affected, hospitality, retail, wholesale trade, and real estate sectors may be particularly vulnerable to reduced business volumes.

The latest events will further dampen demand for both office and residential real estate, which accounts for 31 per cent of banks’ loan portfolios, the report said.

Although off-shore banks (composed of 88 conventional and Islamic banks that account for about 70 per cent of the Bahraini banking sector) do very little lending within Bahrain, some smaller specialized institutions are highly exposed to Bahraini and regional real estate through proprietary investments and are likely to face increased pressures, according to the report.

The political tensions tend to impact the Bahraini banking sector’s funding. Although we have so far seen little evidence of deposit withdrawal, any sustained flare-up in political violence would hurt depositor confidence, the report said.

Larger denomination institutional deposits and short-term interbank deposits from foreign banks will be less stable than retail deposits, so smaller domestic and off-shore banks reliant on these sources are likely to be more exposed to liquidity pressures and higher funding costs, according to the report.

The report rated three domestic banks and four off-shore banks in Bahrain.

The domestic banks are National Bank of Bahrain (NBB, A3 review for downgrade; C-/Baa1 review for downgrade), BBK (A3 review for downgrade; C-/Baa2 review for downgrade), BMI Bank (Baa3 review for downgrade; D/Ba2 review for downgrade), Bahrain Islamic Bank (BIsB, Baa2 review for downgrade; D/Ba2, review for downgrade).

The off-shore banks are Arab Banking Corp (ABC, Baa3 review for downgrade; D+/Ba1 review for downgrade), Gulf International Bank (GIB, A3 review for downgrade; D+/Ba1 review for downgrade), Investcorp Bank (Ba2 negative; D/Ba2 negative), and United Gulf Bank (UGB, Ba1 negative; D-/Ba3 negative), according to the report. – TradeArabia News Service