Moody’s changes Bahrain’s banking outlook to stable from negative on stronger government finances slightly higher economic growth and stronger government finances with the help of a $10 billion (Dh36.7bn) aid package pledged from Arabian Gulf neighbours, Moody's Investor Services said.
Bahrain’s real GDP growth will increase to 2.1 per cent this year from 1.8 per cent last year, according to the report published Wednesday.
Moody’s projects Bahrain’s deficit to be around 7 per cent of GDP this year, narrowing gradually to under 6 per cent next year, from more than 14 per cent in 2017 and an estimated 10 per cent last year.
“The economy will see slightly higher growth, while the aid package from the Gulf Cooperation Council will help replenish foreign-currency reserves and help to stabilise the economy,” said Ashraf Madani, a vice president and senior analyst at Moody’s.
Bahraini banks’ funding and liquidity conditions will remain healthy, Moody’s said. Although vulnerabilities include large volumes of foreign-currency funding and sizable depositor concentrations, the banks hold more than enough liquid assets at 34 per cent of total tangible assets, the report said.
“We expect Bahraini banks to maintain strong capital, as solid profits will generate sufficient capital to balance rising risk-weighted assets caused by loan growth. And their profitability will remain sound, fuelled by rising lending volumes and stable profit margins,” Mr Madani said.
The $10bn package from the UAE, Kuwait and Saudi Arabia comprised of long-term low interest rate loans was pledged in October. The first instalment of $2.3bn was released late last year. Additional funding is contingent on the implementation of Bahrain’s fiscal balance programme, which was introduced last year to eliminate its deficit by 2022.
Earlier this month, the International Monetary Fund said Bahrain has started implementing elements of its fiscal programme and is on track to achieve balance. The programme, which aims to save 800 million Bahraini dinars (Dh7.8bn) in annual spending, includes introducing a value-added tax, a voluntary retirement scheme for public-sector employees and efficiency measures to reduce expenditures.
The governor of the Central Bank of Bahrain, Rasheed Al Maraj, said in February that overall profitability of Bahrain's banks grew 8 to 9 per cent last year and that he expects this to be maintained this year. Mr Al Maraj cited sufficient liquidity, an improving economy and major infrastructure projects as driving factors.
The Moody’s report said accelerated off-budget spending on large infrastructure projects, financed by the GCC, will drive continued recovery in the construction and real estate sectors. As construction projects reach completion, the pace of domestic loan growth will slow to between 4 and 5 per cent this year, compared to 9 per cent last year and 8 per cent in 2017.
Foreign-exchange reserves have improved slightly to $1.9bn in December from a low of $1.3bn in July, largely due to the GCC support package, the report said.
Bahraini banks will continue to be a key source of the government’s deficit financing. Although fiscal consolidation will slow the rate of debt accumulation, Moody’s projects that Bahrain’s government debt, including borrowing from the central bank, will approach 100 per cent of GDP over the next three years from an estimated 95 per cent last year and 88.2 per cent in 2017.
Bank lending to the government has been increasing almost on a yearly basis since the global financial crisis in 2009, with exposure in the form of securities and loans making up 27 per cent of domestic banking assets last year compared to around 11 per cent in 2009. This deepening exposure links the banks’ creditworthiness to that of the government’s low B2 credit rating, a non-investment grade rating described as highly speculative.
Bahrain’s banking sector includes onshore retail banks, of which 23 are conventional and six Islamic, with combined consolidated assets of 32.6bn Bahraini dinars, and offshore wholesale banks, 55 conventional and 16 Islamic, with combined assets of 40bn Bahraini dinars.
Moody’s ratings covered four Bahraini retail banks, two conventional and two Islamic, which together account for about 27 per cent of banking assets. BBK, the National Bank of Bahrain, Bahrain Islamic Bank and Khaleeji Commercial Bank were all given B2 ratings. Gulf International Bank, an offshore wholesale bank, was given a BAA1 rating, associated with moderate credit risk.
Bahrain's banks are largely deposit-funded with a favourable loan-to-deposit ratio of 82.7 per cent as of December. Banks’ profitability will remain stable over the next 12 to 18 months at 1.6 per cent of tangible banking assets, and is broadly in line with the GCC average, the report said.
Bahrain’s banking system joins other Gulf countries, such as the UAE, Saudi Arabia and Kuwait, with a stable outlook. Oman, whose credit rating was downgraded by Moody’s to junk in March, has a negative outlook for its banking sector.