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Announcement:

Moody's: Outlook remains negative for Bahrain's banking system

17 Apr 2012

Limassol, April 17, 2012 -- The outlook on Bahrain's retail banking system remains negative, reflecting the fragile operating environment, leading to slow economic growth prospects and heightened downside risks over the 12-18 month outlook period, says Moody's Investors Service in a new Banking System Outlook just published. Moody's says that these conditions will in turn weigh on retail banks' domestic asset-quality and profitability metrics, although systemic risks will be mitigated by banks' healthy liquidity and relatively strong capital positions.

The new report, entitled "Banking System Outlook: Bahrain", is now available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_141438.

Moody's central scenario assumes real GDP growth of around 3.2% for 2012, well below the 5.9% average growth recorded between 2000-10. Amidst the context of prevailing social unrest, the rating agency expects private-sector confidence, investment appetite and foreign direct investment to remain low over the outlook period, leading to weak business growth prospects for banks.

In Moody's view, a resurgence of large scale protests and/or street violence remains a downside risk, which would be detrimental to the already fragile market confidence towards Bahrain and negatively impact Bahrain's economy and banking system.

Aggregate non-performing loans (NPLs) for the largest retail banks will likely exceed 8% of gross loans by end-2012, from around 7.5% at end-2011. Moody's says that areas particularly at risk from weak loan performance are the troubled real-estate sector and small and mid-sized enterprises (SMEs) in cyclical industries like tourism and retail trade, which account for around 21% of the country's GDP. These industries contracted over the first nine months of 2011, and Moody's expects that the ongoing social unrest will likely prevent a recovery to pre-crisis levels over the next 12-18 months.

Profitability will likely decrease slightly in 2012 from levels achieved in 2011. Pre-provision income to average risk-weighted assets (RWAs) was 2.0% and net income to average RWAs 1.1%, as at the end of December 2011. While lower net interest margins and higher operating expenses will likely suppress net profits, Moody's expects that the banks will continue to have an adequate earnings capacity to absorb elevated levels of provisioning expenses.

Despite weakening asset quality and profitability, Moody's considers that systemic risks will be mitigated by Bahraini banks' healthy liquidity and relatively strong capital positions.

Moody's expects capitalisation levels to remain broadly stable as banks continue to absorb high provisioning expenses through their recurring earnings, whilst muted business growth opportunities imply that banks will likely not deploy any excess capital. However, Moody's highlights that the financial performance of Bahraini banks varies significantly, with some of the weaker, typically smaller, banks' solvency more vulnerable to any negative developments in the operating environment.

The Bahraini retail banking sector continues to exhibit a sound funding and liquidity profile. Bahraini banks are primarily deposit-funded (deposits account for 72% of non-equity funding), with moderate reliance on international capital markets and interbank funding. The projected low credit-growth environment and high government spending will support banking sector funding and liquidity. Although Moody's expects high deposit concentrations to remain a structural challenge, high deposit balances from Bahrain and other GCC governments have been a source of stability in recent years.

Moody's report focuses on the developments and trends affecting the Bahraini local commercial sector (known as retail). The offshore banks (known as wholesale) are characterised by limited participation in the domestic banking system and their domestic assets account for less than 10% of total assets. Quoted figures, unless stated otherwise, are for the seven largest retail banks in Bahrain.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Christos Theofilou, CFA
Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves?J?Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Outlook remains negative for Bahrain's banking system
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