The outlook on Bahrain's banking system remains negative, but any systemic risks will be mitigated by the domestic retail banks' healthy liquidity and relatively strong capital positions, a Moody's Investors Service report said.

The negative banking system outlook expresses Moody's expectations for the fundamental credit conditions in this sector over the next 12-18 months and reflects the continued challenges facing Bahrain's operating environment further to the political unrest earlier this year, said the 'Banking System Outlook' published today.

'We believe that the unrest and its ramifications will exert negative pressure on banks' asset-quality performance, and on growth and profitability. However, systemic risks will be mitigated by the domestic retail banks' healthy liquidity and relatively strong capital positions,' said Christos Theofilou, a Moody's analyst and co-author of the report.

The report notes that, for 2011 and 2012, Bahrain will likely register 2 per cent and 3 per cent real GDP growth, respectively, down from 4.5 per cent in 2010 and 6-8 per cent between 2006-08.

'Given our growth forecasts, asset-quality pressures are likely to increase, particularly for loans originated to the tourism and retail trade sectors where the political unrest has severely disrupted operations. We also expect the underlying political tension to hamper private-sector investment and constrain the retail banking sector's domestic business growth,' said Theofilou.

Real-estate exposure continues to be Moody's primary asset-quality concern within Bahrain's banking system over the next 12-18 months.

Recent events will delay recovery in that sector, which is characterised by oversupply and declining rental and sales prices. As a result of these pressures -- and because of subdued business growth prospects -- Moody's expects profitability to decline over the outlook horizon.

'We do not, however, expect asset-quality pressures to develop into a systemic threat for the overall Bahraini retail banking sector, mainly because of the sector's relatively strong capitalisation profile, which provides substantial loss-absorption capacity. However, whilst Bahraini retail banks exhibit high regulatory ratios, some smaller banks exhibit very weak asset-quality track records,' added Theofilou.
 
The banking system's liquidity remains adequate. During the unrest, there were no significant deposit outflows and frozen credit lines with international banks -- and some deposit conversions by depositors from Bahraini dinars into foreign currency -- were reversed soon after the unrest subsided. In addition, Bahraini retail banks have also maintained an excess of short-term placements over short-term market funding.

Moody's says that system liquidity will remain adequate over the outlook horizon, given the outlook for continued moderate loan growth and the anticipated increase in government spending. However, Bahraini wholesale banks will remain exposed to the more challenging market funding environment. - TradeArabia News Service