S&P banking industry country risk assessment: Bahrain is high risk
S&P Global Ratings classifies the banking sector of Bahrain (B+/Stable/B) in group ‘7’ under its Banking Industry Country Risk Assessment (BICRA). Bahrain has a more diversified economy than its GCC peers and a higher per capita GDP than its BICRA group peers. The country’s fiscal and external revenues remain strained as a result of volatile oil prices, and low gross international reserves covering less than one month’s current account payments and about 40% of the monetary base over the first quarter of 2018, according to S&P estimates.
Banks’ comparatively high, albeit decreasing, exposure to the cyclical construction and commercial real estate (CRE) segments is a negative factor, as is the high amount of nonperforming and restructured loans in these segments.
“In our view, adequate banking regulation and supervision in Bahrain supports domestic banks. However, we consider that the overbanked status of the Bahraini banking system– with a small bankable population and economy–fosters intense competition and squeezes interest margins.”
High shares of customer deposits, including from local and foreign owners, and limited reliance on external debt, feature prominently in retail banks’ funding profiles.
Positively, the impact of volatile oil prices on domestic liquidity has remained limited, demonstrated by a fairly stable amount of domestic deposits and even a slight increase in deposits during 2017 and the first half of 2018. However, like their regional peers, Bahraini banks have limited opportunities to meet their funding needs from the underdeveloped domestic financial market.
Economic And Industry Risk Trends
We view the trend for Bahrain’s economic risk as stable, despite the current bleak operating
environment following volatility in oil prices and the continued pressure on the country’s fiscal and
While we expect Bahrain’s residential and commercial housing prices will stagnate, in our view the asset quality impact on banks will be manageable. We note that the exposure of banks to the construction and real estate segments has stabilized at about 19% of total nonbank gross loans, but stood at a still high 35% of commercial loans at June 2018.
We view the trend for Bahrain’s industry risk as stable. The stiff competition in financial services will likely limit the scope for growth at Bahrain’s retail banks. We expect banks will remain in a net foreign liability position, which we expect will exceed 10% of gross loans over the next 12 months.
We expect that economic growth will slow to less than 3.0% per year on average over 2018-2020 from an average of 4% between 2012 and 2015. We expect that existing and future fiscal consolidation measures will act as a drag on growth, and potentially weigh on consumer confidence. Still, Bahrain has a more diversified economy than GCC peers, with oil accounting for approximately 20% of GDP; supportive disbursements from GCC funds are boosting infrastructure investment and Bahrain’s services sector continues to grow.
Bahrain’s proximity to the large market of Saudi Arabia, its strong regulatory oversight of the financial sector, relatively well-educated workforce and low-cost environment, continue to provide investment incentives and facilitate the growth of the non-oil economy. Yet Bahrain’s comparatively high population growth results in stagnating per capita GDP growth.
We expect that continued wide fiscal deficits will lead to a general government debt burden of about 92.7% of GDP by the end of 2020 (from 30% of GDP in 2010) and consider that the pace of fiscal consolidation is likely to be slow given political constraints.
We believe Bahrain is still in a correction phase, supported by the continued decrease in real estate prices in real terms and the high amount of nonperforming assets (including restructured loans) of retail banks. We expect the volatile oil-price environment, upcoming implementation of fiscal consolidation measures on households’ budgets, and heightened competition from other rising financial hubs will further delay the return to a flat-to-positive real estate price growth that we would view as a sign of the domestic real estate markets transitioning to an expansionary phase.
Credit risk in the economy
With a domestic private and nonfinancial public sector credit-to-GDP ratio slightly above 70% in 2018, by our forecasts, Bahrain ranks between Morocco and Portugal. About one-half of Bahrain’s private sector debt is in the corporate sector, which has been fuelling the system’s moderate lending growth. We expect mid-single-digit corporate lending growth in 2018 and 2019. In our view, credit risks from retail lending are lower, owing to high personal loan collateralization through salary assignments (about one-third of total personal loans in June 2018) and mortgages (45% of total personal loans on the same date). We note that retail debt continues to be muted, in line with current trends and as a result of the difficult domestic economic conditions.