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Political tension 'Credit Negative' for Bahraini banks, says Moody's.

The agency says the political crisis in Bahrain escalated with the arrival of Gulf Cooperation Council (GCC) troops, a crackdown on anti-government protests, the arrest of opposition leaders, and the imposition of a 12-hour daily curfew. This increasing tension, says Moody's, is credit negative for Bahraini banks, several of which have kept their branches closed amid the volatile situation. It reinforces fears of prolonged political and economic uncertainty, which is likely to hurt the banks' financial condition.

Moody's expects the domestic banking sector (composed of 25 conventional and Islamic banks) to face increased asset quality pressures during 2011, as the disruption of normal economic activity hits businesses. With tourism flows and commerce naturally affected, the hospitality, retail, wholesale trade, and real estate sectors appear to be particularly vulnerable to reduced business volumes. It is likely that the latest events will further dampen demand for both office and residential real estate. This sector accounts for 31 per cent of banks' loan portfolios.

Although off-shore banks (composed of 88 conventional and Islamic banks that account for about 70 per cent of the Bahraini banking sector) do very little lending within Bahrain, some smaller specialised institutions are highly exposed to Bahraini and regional real estate through proprietary investments and are likely to face increased pressures.

Moody's also expects the ongoing political tensions to impact the Bahraini banking sector's funding. Although so far there has been little evidence of deposit withdrawal, any sustained flare-up in political violence would hurt depositor confidence. Larger denomination institutional deposits and short-term interbank deposits from foreign banks are likely to be less stable than retail deposits, so smaller domestic and off-shore banks reliant on these sources are likely to be more exposed to liquidity pressures and higher funding costs.

The ratings agency's concerns for the system as a whole are partly mitigated by improved loan-to-deposit ratios and liquid asset levels compared with before the 2008 financial crisis, as banks cut back on new lending. Also, both domestic and offshore banks exhibit a low dependence on funding from outside the GCC, which became scarce in the aftermath of the global banking crisis and separate GCC-specific developments, such as Dubai's financial troubles and the defaults by two large Saudi business groups that borrowed extensively from abroad. Moody's estimates that about 20 per cent of domestic banks' funding come from outside Bahrain, mainly from other GCC countries.

The Bahraini authorities have relatively modest capacity to inject liquidity into the banking sector but there is evidence of financial solidarity from other GCC governments and, says Moody's, it would come as no surprise 'if neighbouring Saudi Arabia provides emergency liquidity to Bahrain's domestic banking sector'. Earlier this month, GCC governments pledged $10 billion in aid to Bahrain.

Finally, looking beyond the immediate impact on Bahraini banks' financial condition,the ongoing political crisis poses serious challenges to Bahrain's status as a regional financial hub. Bahrain's reputation as an attractive and safe place to live and work, says the agency, 'has been tarnished and will be difficult to restore in the absence of a convincing resolution to the current political divide'. Moody's believes that over the coming months, this could divert any potential new entrants to competing GCC locations such as Abu Dhabi, Dubai, and Qatar.

2011 CPI Financial. All rights reserved.

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Publication:CPI Financial
Geographic Code:7BAHR
Date:Mar 22, 2011
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