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Outlook for banks ‘remains negative’

Bahrain Business
Wed, 11 Jul 2018

MANAMA: The outlook for the Bahraini banking system remains negative, as constrained government spending will weaken economic growth, says Moody’s Investors Service in a report.

The market update report titled, “Banking System Outlook - Bahrain; Slowing economy and government spending constraints drive our negative outlook”, says slower growth and government spending constraints weigh on asset quality and profitability of banks in Bahrain.

“Despite a rise in oil prices, the government’s budget deficit will oblige it to constrain spending, which will moderate growth in the non-oil economy,” says Ashraf Madani, a vice-president and senior analyst at Moody’s, and author of the report.

“Higher borrowing costs due to rising interest rates, and reduced subsidies will weigh on corporate and household income, putting mild pressure on loan quality. In addition, rising government debt is reducing the government’s capacity to support the country’s banks in a crisis,” added Mr Madani.

Moody’s expects Bahrain’s economic growth to slow to 2.8 per cent in 2018 from 3.9pc in 2017 as the government constrains spending, due to its large budget deficit.

As a result, credit growth will decelerate slightly to 5pc-7pc from 8pc in 2017.

Net income at Bahraini banks will decline slightly to around 1.3pc of average assets in 2018, compared with 1.4pc in 2017.

This is mainly due to higher loan-loss provisions as problem loans rise. Pre-provision profit will likely remain at around 1.9pc of average assets benefiting from cost-cutting initiatives. Nonetheless, capital will remain strong and stable.

Moody’s says that it expects average tangible common equity to remain at 12.3pc of adjusted risk-weighted assets, as moderate loan growth is balanced by the banks’ strong profit retention.