Improving prospects for the banking system in Bahrain

Manama: Profitability of Bahrain’s banks will return to pre-pandemic levels over the next 12-18 months, predicts Moody’s Investors Service, noting that resilient funding, liquidity and capital positions are back after the economic shock of the coronavirus.

In reports released yesterday, the US-based rating agency changed the outlook for the banking systems of Bahrain, Saudi Arabia, Kuwait, United Arab Emirates, Qatar and Oman from stable to negative, as operating conditions improve after the pandemic.

“We have changed the banking outlook in the Gulf Cooperation Council states as soaring oil prices boost economic activity and economies recover from the coronavirus shock,” said Nitish Bhojnagarwala, vice president and head of credit at Moody’s.

“Non-oil activities, including tourism, will also contribute to the improvement in some areas.”

Moody’s expects Bahrain’s non-oil sector, where banks do most of their business, to grow 3.2% in 2022 and 2023 after rebounding to 3.6% in 2021 after a contraction of 5, 9% in 2020 (contraction of 0.4% in 2019).

Rising oil prices are easing government spending constraints and a new national economic growth plan will help revive the non-oil sector, the report said.

Recovering business and consumer confidence will support lending, while the easing of social distancing measures and travel restrictions – in particular the reopening of the border with Saudi Arabia from where millions of tourists arrive every year – will encourage a return to business as usual.

Off-budget spending on GCC-funded infrastructure projects will continue to provide business opportunities for banks.

Although the global fallout from Russia’s invasion of Ukraine is increasing uncertainty, the impact on Bahraini banks remains small at this stage given their limited direct exposure to both countries, while domestic tensions and geopolitics continue to pose downside risks.

The agency expects the capital base held by Bahraini banks to remain broadly stable as modest loan growth is offset by profit retention.

It indicates that the existing stock of problem loans is fully covered by provisions (at 110.3% in December 2021) providing an additional layer of protection.

The net profit of Bahrain’s banks will continue to improve, estimates Moody’s.

Net income fell to 1.2% of tangible assets in 2021 after falling to 0.9% during the 2020 pandemic (1.5% in 2019), but remains below pre-pandemic levels.

The recovery was spurred by a reduction in loan loss provisioning charges.

The rating agency expects that some level of provisioning will still be required as forbearance measures are lifted.

Net interest margins will be preserved on rising interest rate expectations, while tight cost control will help keep pre-provision earnings at around 2% of average assets, he says.

Funding needs will be low due to a modest expansion in lending, and lending represented a comfortable 78.8% of deposits in December 2021.

Identifying the vulnerabilities, Moody’s says large concentrations of deposits from single depositors (particularly from government and its related institutions) and high volumes of foreign currency liabilities remain vulnerabilities, although most funds are stable and come from neighboring GCC countries.

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