Bahrain’s domestically focused onshore banking system is expected to remain stable, driven by steady operating conditions and projected 3.3 per cent growth in the non-oil economy, according to Moody’s.
Despite this positive outlook, the reversal of the interest rate cycle is expected to squeeze profit margins back to historical averages.
While lower interest rates will impact profitability, moderately higher lending volumes and sustained fee income are expected to cushion the blow. Loan performance is forecast to remain broadly stable, although concentration risks, particularly exposure to Bahraini sovereign debt through lending and government securities holdings, remain a concern. These risks are mitigated by the banks’ ample funding, liquidity, and capital levels.
Buoyant economic activity, supported by stable oil prices and strong regional growth, especially in Saudi Arabia, will continue to bolster business and consumer confidence. Growth in the non-hydrocarbon economy, where banks conduct most of their lending, is projected at around 3.3pc in 2025.
While government spending remains constrained, falling interest rates, coupled with growth in tourism, manufacturing, and government-sponsored infrastructure projects, will stimulate demand.
However, banks’ exposure to sovereign debt remains high due to the government’s large fiscal deficit. This direct government exposure links the banks’ credit strength to that of the sovereign.
Nonperforming loans (NPLs) are expected to remain broadly stable, although risks persist in the real estate, construction, and manufacturing sectors. Easing interest rates should alleviate pressure on the retail sector. Concentrated lending to single borrowers and sectors remains a risk.
Capital levels are expected to remain adequate, with tangible common equity projected to remain broadly stable. Net profit margins will likely moderate as interest rates decline, but this will be partially offset by higher lending volumes and fee income.
Funding and liquidity are expected to remain sound, with retail banks largely deposit-funded. However, reliance on market funding and large depositors presents some risks, particularly given the volume of foreign currency deposits.
avinash@gdnmedia.bh
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