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Rating Action:

Moody's downgrades Bahrain Islamic Bank to Baa2/P-3/D; on review for further possible downgrade

31 Jan 2011

Paris, January 31, 2011 -- Moody's Investors Service has today downgraded Bahrain Islamic Bank's (BisB) standalone bank financial strength rating (BFSR) to D from D+, which now maps to a Baseline Credit Assessment (BCA) of Ba2 instead of the previous Ba1. The bank's local and foreign currency, long-term and short-term issuer ratings have also been downgraded by one notch to Baa2/Prime-3 from Baa1/Prime-2. Additionally, all these ratings have been placed on review for further possible downgrade.

RATINGS RATIONALE

The downgrade of the BFSR and issuer ratings of Bahrain Islamic Bank reflects (i) the difficult market conditions in which Bahraini banks continue to operate; (ii) the bank's deteriorated asset quality and heightened provisioning needs; (iii) Bahrain Islamic Bank's weak financial performance stemming from the cost of concentration risks materialising in heavy losses for two consecutive years; and (iv) uncertainties over the bank's ultimate shareholding structure.

BisB has recorded a second year of losses in the wake of sizeable provisioning charges. Asset quality has materially deteriorated on the back of two simultaneous credit issues: (i) large exposures to defaulting Saudi groups of companies, but well provisioned for; and (ii) the massive restructuring of property-related lending, which constitutes the largest sector concentration of the bank, but where collateral is in place. Besides, the bank is also facing uncertainties as to its shareholding structure, with defaulting Investment Dar of Kuwait, still holding 40% of its capital.

Moody's decision to place all of BisB's ratings on review for possible further downgrade is also linked to concerns regarding current capitalisation levels. Moody's notes that BisB has initiated a plan aimed at raising up to BHD54 million in new capital via a rights issue with the aim of preparing for future growth, as well as for possible future losses should further provisioning be required. Moody's says that success in this respect would likely ease the downward pressure on the bank's rating. Conversely, if the capital increase is called off or delayed, BisB's ratings would likely be negatively affected.

According to Moody's Joint-Default Analysis methodology, BisB's Baa2 long-term rating benefits from an uplift of three notches from the rating agency's assumption of systemic support.

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

The last rating action on BisB was implemented on 10 February 2009, when Moody's assigned a Baa1 long-term and Prime-2 short-term local and foreign currency issuer ratings as well as a D+ bank financial strength rating (BFSR) to BisB, with a stable outlook.

Bahrain Islamic Bank is headquartered in Manama, Bahrain, and reported total assets of BHD936 million (USD2.5 billion) at 31 December 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Paris
Anouar Hassoune
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Yves Lemay
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Bahrain Islamic Bank to Baa2/P-3/D; on review for further possible downgrade
No Related Data.
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