Bahrain banks' asset quality to dwindle but remain contained for now: S&P

Gulf state's economy to rebound by 2021

The Central Bank of Bahrain is seen in Manama. Image for illustrative purposes.

The Central Bank of Bahrain is seen in Manama. Image for illustrative purposes.

REUTERS/Hamad I Mohammed

Property prices in Bahrain will fall at an accelerated pace while banks will face pressure on profits towards the end of 2020 due to the coronavirus pandemic and low oil prices, according to a new analysis.

However, such deterioration, including a potential decline in asset quality indicators, will remain “broadly manageable” even under a base-case scenario, ratings agency S&P said on Thursday.

The ratings agency noted that the measures carried out by the country’s central bank have been effective so far.

The authority has relaxed prudential requirements and asked banks to defer instalments for six months, in a bid to help the private and retail sectors cope with the pandemic.

S&P cautioned that if the relief measures are not extended, the asset quality indictors of the country’s banks will likely erode towards the end of 2020.

NPL, credit losses

The agency said it expects non-performing loans (NPL) ratio to near 10 percent this year compared to 8 percent in 2019, while credit losses are likely to more than double to 180 basis points (bps) in 2020-2021 from 80 bps in 2019.

“These estimates remain consistent with our current view of Bahrain’s economic risks, as per our Banking Industry Country Risk Assessment (BICRA),” S&P said.

The country’s gross domestic product (GDP) is forecast to drop by 5 percent this year, while the slowdown in larger Gulf economies will also weigh on Bahrain’s small economy.

Impact across sectors

The impact will be felt in the tourism, transportation and real estate sectors. The financial services and manufacturing sectors will also experience some slowdown.

“The adverse effects of COVID-19 and low oil prices on Bahrain’s economy are likely to include an accelerated decline of real estate prices and weakened asset quality indicators and profitability of domestic retail banks,” S&P said.

“However, under our base-case scenario, such deterioration would occur toward the end of 2020, when regulatory forbearance measures are lifted, and should remain broadly manageable,” said S&P.

By 2021, the state’s economy could rebound, with real GDP likely to expand by 3.5 percent.

(Writing by Cleofe Maceda; editing by Seban Scaria) 

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© ZAWYA 2020

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