CBB’s steps ‘effective’ in easing pandemic impact on retail banks
MANAMA: The adverse effects of Covid-19 and low oil prices are seen triggering an accelerated decline in profitability of domestic retail banks in Bahrain, says S&P Global Ratings.
However, under the base-case scenario of the ratings agency, such deterioration (lower real estate prices and weakened asset quality) would occur toward the end of 2020, when regulatory forbearance measures are lifted, and should remain broadly manageable.
The Central Bank of Bahrain’s measures to ease Covid-19 impact have been effective so far, said S&P in a report yesterday.
It relaxed various prudential requirements and asked banks to defer instalments for six months to help the country’s private and retail sectors cope with the sharp weakening in their operating environment.
If the central bank does not extend these measures, however, domestic banks’ asset quality indicators will likely erode towards the end of this year.
S&P expects the system’s nonperforming loans (NPLs) ratio to near 10pc in 2020 from 8pc in 2019.
It also expects credit losses to increase to 180 basis points (bps) in 2020-2021 from 80 bps in 2019.
Both the NPL and credit loss calculations are based on the eight largest retail banks in the system.
These estimates remain consistent with the agency’s current view of Bahrain’s economic risk, as per Banking Industry Country Risk Assessment (BICRA).
However, given the uncertainty around the end of the pandemic, a sharper-than-expected decline in the economy or a later–than-anticipated recovery could alter projections, it said.
S&P has forecast a 5pc contraction of Bahrain’s real GDP this year, owing to the slowing effect of the pandemic and lower oil prices on consumption and investment activities.
In addition, the deceleration in larger GCC economies will weigh on Bahrain’s small economy, given the close links.
This will likely materialise through the tourism, transportation, and real estate sectors.
While S&P does not anticipate a decline in Bahrain’s oil and gas sector as the country is a small producer and not subject to OPEC cuts, however the other large sectors such as financial services and manufacturing will likely slow.
The kingdom’s economy is set to rebound next year, with real GDP expanding by 3.5pc, said the agency, expecting growth in Bahrain to average around 2.3pc in 2022-2023.
The kingdom’s relatively diverse economy benefits from its proximity to the large market of Saudi Arabia, sound regulatory oversight of the financial sector, a relatively well-educated work force.
Moreover, $10 billion in financial support from other GCC sovereigns will partially cover the government’s funding needs until 2023.
S&P expects the likelihood of further GCC support, should it be necessary, will help maintain confidence in the Bahraini dinar’s peg to the US dollar.
The country’s retail banks are in a net external liability position that could prove vulnerable to domestic or regional stresses.
Positively, retail banks’ net external debt remains contained at 10.8pc of systemwide domestic loans as of June 30, 2020, compared with 9.8pc at end-2019.
The agency expects it to climb to around 15pc in the next 12-24 months as banks raise external funds.
A large portion of the banking sector’s external funding is understood to be from the GCC countries and therefore expected to be rolled over.
Last year, banks increased their overall exposure to the sovereign and the central bank by 17.5pc, reaching almost 20pc of total assets.
