Moody's Investors Service has today downgraded the supported ratings of two Bahraini banks. National Bank of Bahrain BSC's (NBB) long-term local currency deposit rating was downgraded by one notch to A2, while BBK BSC's local and foreign currency
deposit ratings were similarly downgraded by one notch to A3/Prime-2 and its senior and subordinated debt ratings to A3 and Baa1, respectively. All ratings now have a stable outlook.
Today's downgrades conclude the review on these ratings that had been initiated in August 2009, within the context of Moody's global review of systemic support available for banking systems. They follow Moody's downward reassessment of the Bahraini government's ability to provide systemic support to the domestic banking sector.
The rating downgrades for NBB and BBK were not driven by any reassessment of their standalone financial strength. Accordingly, their bank financial strength ratings (BFSRs) have been affirmed.
Earlier this year, Moody's published a Special Comment on its review of the capacity of governments and central banks to support their banking systems entitled: "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries," available on moodys.com.
Consistent with the analytical criteria specified in the Special Comment and given Bahrain's current situation and future prospects, Moody's has changed the systemic support input for Bahraini retail banks' ratings to A1 from the Aa2 local currency deposit ceiling. The new A1 systemic support anchor for Bahraini banks is placed one notch above the A2 local currency government debt rating. At the A1 level, the supporting entity rating for Bahraini retail banks generates a lower rating uplift of just two notches for NBB and BBK, rather than the three notches prior to this adjustment and this has resulted in the downgrade of the two banks' supported ratings.
In the Special Comment, Moody's noted that the appropriate reference rating for the capacity of a national government to provide support to banks in a prolonged and widespread crisis would be aligned with or constrained by the government's own debt rating. However, Moody's explained that it might deem it appropriate to adjust this rating, usually positively, to reflect the non-fiscally dependent measures that many central banks and governments can deploy to support banks.
In deciding whether the local currency-denominated deposits of a bank can be rated higher than the local currency-denominated debt issued by the national government due to systemic support, Moody's considers a number of factors for each banking system. These are: the size of the banking sector relative to the government's resources; the level of stress in the banking system and in the economy; the foreign currency obligations of the banking system relative to the government's own foreign currency resources; political and historical patterns; and the possibility of any drastic shift in government priorities.
Moody's regards the systemic importance of the Bahraini domestic banking system as high in terms of the ratio of banking assets to GDP of about 230%, which inevitably weighs on the bank's ability to support the entire sector. In this assessment Moody's excludes the much larger Bahraini wholesale banking sector, which does not form part of the domestic banking system and for which no systemic support is implied. The relatively high proportion of retail bank foreign currency obligations, relative to GDP are another constraint on the Bahraini government's ability to provide effective systemic support.
Conversely, Moody's considers that the level of stress in the Bahraini retail banking system, although increased relative to previous years, remains relatively modest. This assessment factors the strong starting position of rated Bahraini retail banks in terms of capital, profits and liquidity and Moody's assumptions for a moderate increase in non-performing loans, within the context of a shallow (relative to most European economies) economic slowdown. The weighted average BFSR for the rated Bahraini retail banks is C-.
The political and historical evidence in favour of assessing Bahrain as a highly supportive banking framework for retail banks is strong. Over the past few years, even small private sector retail banks have been bailed out, though such incidents have been rare. In Moody's opinion, the attitude of the Bahraini government to supporting domestic retail banks has not changed and is unlikely to change in the foreseeable future.
The A1 systemic support input for Bahraini retail banks is one notch above the A2 local currency government debt rating. The uplift reflects Moody's view that the risk of a system-wide banking crisis is moderate-to-low and that the likelihood of the government "ring-fencing" its own fiscal position from the banking system is also low.Global Arab Network