Write-downs continue to impact Bahraini banks

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BAHRAIN BANKS: Write-downs continue to impact; profitability forecast to be 'adequate' says Fitch in new report. (Getty Images)

Credit ratings agency Fitch says in a just published report ('Bahraini Banks: Annual Review and Outlook') that write-downs continue to impact across the Bahraini retail and wholesale banking sectors.

Profitability for 2009 meanwhile is forecast to be 'adequate'.

"Although asset quality remains reasonable, loan impairment charges are rising from low levels," says Philip Smith, Senior Director in Fitch's Financial Institutions team.

"Many banks reported loan growth well in excess of 20 percent in 2007, which could result in asset quality problems as the credit cycle turns," he adds.

Fitch says Bahraini retail banks like National Bank of Bahrain (NBB, 'A'/Stable), BBK ('A-' (A minus)/Stable) and Ahli United Bank (AUB, 'A-' (A minus)/Stable) are likely to see lower profitability due to slower loan growth, and continued pressure on asset quality and capital, although these are likely to be maintained at adequate levels. Nevertheless, adequate profitability remains underpinned by stable net interest margins and cost control.

Following the de-risking of the balance sheets of the two major Bahraini wholesale banks, Arab Banking Corporation (ABC, 'BBB+'/Stable) and Gulf International Bank (GIB, 'A'/Stable) in 2008, Fitch expects these to be modestly profitable in 2009.

However, the agency notes that a strategic shift is likely for ABC and GIB as the wholesale banking model that they have followed has become challenging in the credit crisis due to their reliance on wholesale funding and past exposure to toxic assets.

ABC has decided to follow a "universal" banking model with a greater focus on retail banking. GIB is also reviewing its strategy.

Fitch notes that the new strategies are surrounded by execution risks and the agency says it will monitor developments closely.

Following large cumulative impairment charges (ABC: $1.2bn, GIB: $1.3bn) over the last two years, Fitch believes that the potential for further major investment losses is limited.

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