Global Arab Network | Moody's downgrades Bahrain-based BMI Bank's rating

Translate this article to your language:

GANPublications

e-Publications

Add Site to Favorites

Add Page to Favorites

Make Homepage

Share This Page

RSS Feed

--------------------------------------------------------------------------------------------------------------------
| |

Moody's downgrades Bahrain-based BMI Bank's rating

Global Arab Network - - Gamal Ragay

Monday, 01 March 2010 14:37

Moody's Investors Service has today downgraded the local and foreign currency deposit ratings of Bahrain-based BMI Bank B.S.C. (BMI) to Baa3/Prime-3 from Baa2/Prime-2, and its bank financial strength rating (BFSR) to D from D+. The outlook on the D BFSR is negative.

According to Moody's, the rating downgrade reflects BMI's weakened franchise and profitability as it reduces its cross-border syndicated lending activity that still forms a large part of the bank's business mix. This development is driven primarily by the much reduced availability of cheap wholesale funding and the weakened financial health of regional borrowers that has led to a marked deterioration in the risk-reward characteristics of this business. Higher levels of credit and liquidity risk have also curtailed the short-to medium-term growth prospects of the bank's niche banking subsidiaries in Africa and in other Middle Eastern markets.

Moody's rating review also assessed BMI's decision to refocus on its small domestic retail and commercial banking business in Bahrain, which had received material capacity investments in recent years. The rating agency acknowledged the soundness of this strategic choice but noted that competition from larger, better established players will also continue to constrain growth and profitability.

Moody's added that its rating action took into account BMI's weak funding structure but also recognised that any immediate liquidity concerns have been alleviated through facilities granted by its major shareholder, BankMuscat (Oman) in late 2008, and thereafter by the running down of the syndicated loan book. Similarly, Moody's has factored the sharp deterioration in the bank's asset quality (with gross non-performing loans rising to 8.1% at the end of 2009, up from 1.8% at the end of 2008), primarily generated by its material exposure to two Saudi groups and a Kuwaiti finance firm.

Moody's said that although current non-performing loans are well provisioned, credit risk remains a major concern and is the prime driver for the negative outlook on BMI's D BFSR. This position incorporates the view that there is potential for further asset quality deterioration over the next few months, given subdued economic growth and reduced access to funding in Bahrain and the Gulf Cooperation Council (GCC), as well as the rapid expansion of real estate lending in recent years.

In this respect, Moody's clarified that BMI's very strong capital position means that any such asset quality deterioration is unlikely to put solvency at risk; therefore the extent of further ratings downside is limited.

Moody's said that negative pressure could be exerted on BMI's BFSR (i) if the current challenging economic environment in Bahrain and the broader GCC leads to further significant deterioration in asset quality, and (ii) if competitive pressures lead to a material decline in recurring profitability. Conversely, negative pressure on the rating could be alleviated (i) on evidence that the profitability of the bank's retail and domestic corporate credit businesses is resilient to competition, (ii) on evidence of a material strengthening of the deposit base and overall funding structure, and (iii) if single-party and sector loan concentrations are materially reduced.

As regards BMI's Baa3 long term local and foreign currency deposit ratings, Moody's explained that it continues to incorporate two notches of uplift due to parental and systemic support. More specifically, the rating is based on (i) the bank's stand-alone financial strength represented by the D BFSR (equivalent to a Baseline Credit Assessment of Ba2), (ii) a very high likelihood of support from its major shareholder BankMuscat (with a Baseline Credit Assessment of Baa1), and (iii) Moody's assessment of a high likelihood of systemic support from the authorities in Bahrain (systemic support indicator of A1). Moody's clarified that the current level of implied shareholder and systemic support is sufficient to maintain the deposit ratings at the current Baa3/Prime-3 level even if the D BFSR was further downgraded. Thus a stable outlook is retained on the deposit ratings

Moody's last rating action on BMI Bank was on 6 August 2009 when its deposit ratings were affirmed.

Global Arab Network

Add comment

The opinions of the authors in articles published are theirs alone and do not necessarily reflect the views of Global Arab Network
------------------------------------------------------------------------------
Published comments are the opinions of private individuals and do not reflect the views of Global Arab Network