June 20, 2017 / 1:40 PM / 5 months ago

Fitch Revises Three Bahraini Banks' Outlooks to Negative

(The following statement was released by the rating agency) LONDON, June 20 (Fitch) Fitch Ratings has revised the Outlooks of National Bank of Bahrain (NBB), BBK B.S.C (BBK) and Ahli United Bank B.S.C (AUB) to Negative from Stable and affirmed the Long-Term Issuer Defaults Ratings (IDRs) of NBB and BBK at 'BB+' and AUB at 'BBB+'. A full list of rating actions is at the end of this rating action commentary. The Outlooks have been revised following the revision of the Bahraini sovereign Outlook to Negative due to a widening government deficit, high and rising debt, the lack of a medium-term fiscal framework combined with high oil dependence and domestic political tensions that hamper fiscal adjustment (see 'Fitch Revises Bahrain's Outlook to Negative; Affirms IDR 'BB+'' dated 12 June 2017 on www.fitchratings.com). KEY RATING DRIVERS IDRs, SRs AND SRFs NBB's and BBK's IDRs are driven by standalone strength of the individual banks, as reflected by their respective Viability Ratings (VRs). They are also underpinned by potential sovereign support, as reflected by their respective Support Rating Floors (SRFs). NBB's and BBK's Support Ratings (SRs) and SRFs reflect Fitch's expectation of a moderate probability of support from the Bahraini authorities, if required. Our view of support is based on the systemic importance of NBB and BBK as major retail and corporate banks in Bahrain, and the Bahraini authorities' high propensity to support domestic commercial banks, albeit with a weakening ability to do so. The Bahraini government holds significant stakes in both banks - 32% in BBK and 44.2% in NBB via Bahrain Mumtalakat Holding Co (the investment arm of the Government of Bahrain) - which is also a factor in Fitch's view on sovereign support. AUB's IDRs and SR reflect a high probability of institutional support from the bank's core shareholder, the Public Institute for Social Security (PIFSS), an arm of the State of Kuwait (AA/Stable), which holds an 18.7% stake in the bank. The strong links between PIFSS and AUB include PIFSS's strong interest as shareholder in both AUB and its Kuwaiti subsidiary (in which PIFSS holds a 12% stake). However, support from PIFSS is constrained by Bahrain's Country Ceiling of 'BBB+' and the Negative Outlook reflects that on the Bahraini sovereign rating. VRs NBB's and BBK's VRs are capped by the operating environment in Bahrain, and more specifically by the Bahrain sovereign rating. Both NBB and BBK are predominantly domestic banks with significant exposure to the sovereign and the domestic operating environment. NBB's VR also reflects the bank's solid capital ratios (albeit only appropriate in the context of a weakening operating environment, lower risk-weighted assets due to high government exposure and a concentrated balance sheet), strong domestic franchise, consistent and solid profitability, generally adequate asset quality despite a fairly high headline impaired loan ratio, and sound liquidity. However, NBB's VR also factors in the bank's reliance on a small and competitive domestic environment and concentrations in both loans and deposits, which although comparing well with GCC peers, still give rise to event risk. BBK's VR takes into consideration the bank's satisfactory and resilient financial performance despite the weakening operating environment in Bahrain. BBK has maintained solid margins and consistent profitability through its well-established franchise. Funding and liquidity indicators remain satisfactory and are important rating drivers. Asset quality metrics are sound. However, BBK's VR also reflects the bank's loan book concentration, which while well below the levels of peers still gives rise to event risk. We also take into account the bank's dependence on the undiversified Bahraini market. In light of the weakening operating environment, Fitch views capital as only adequate despite capital-raising in 2Q16. AUB's VR is not capped by the Bahraini operating environment and sovereign rating, but at this rating level the deteriorating Bahraini operating environment is putting pressure on the bank's VR. AUB's VR benefits from the bank's diversified franchise, with operations across the GCC, specifically in Kuwait, sound asset quality despite exposure to the higher-risk Middle East/North Africa (MENA) markets, such as Egypt, and solid operating profitability. Risk appetite is conservative compared with many peers in the region and asset quality metrics are consistently sound and compare well with peers. AUB's VR also takes into account loan book concentrations, which however is somewhat mitigated at group level by geographic and sector diversification. The rating also reflects capitalisation ratios that although adequate for the bank's operations, are low compared with domestic and regional peers. SENIOR DEBT Senior debt ratings are aligned with the respective banks' IDRs. SUBORDINATED DEBT BBK's subordinated debt is rated one notch below the bank's Long-Term IDRs, reflecting below-average recoveries. RATING SENSITIVITIES IDRS, SRs AND SRFs NBB's and BBK's Long-Term IDRs would only be downgraded if both their VRs and SRFs are downgraded and revised downward respectively. A downgrade of the Bahraini sovereign by one notch would result in a downward revision of NBB's and BBK's SRFs by one notch, reflecting the weakening ability of the sovereign to support its domestic banks. AUB's IDRs are sensitive to a change in Fitch's view of PIFSS's ability or propensity to provide support or to changes in Bahrain's Country Ceiling. The IDRs would be downgraded if Bahrain's Country Ceiling is downgraded or if Fitch believes that PIFSS's ability or willingness to support has diminished. In turn, Bahrain's Country Ceiling is sensitive to a change in Bahrain's sovereign rating, which is on Negative Outlook. VR Downward pressure on NBB's, BBK's and AUB's VRs could arise from a further material worsening of the Bahraini operating environment. The three VRs would be downgraded by one notch if the sovereign rating is downgraded by one notch. Downside risk to NBB's VR may also arise from further deterioration in asset quality. Downside risk to BBK's VR could also arise if asset quality or capitalisation considerably weakens from current levels. AUB's VR is also sensitive to asset quality or liquidity deterioration or if the bank's Fitch core capital ratio is severely eroded. SENIOR AND SUBORDINATED DEBT The senior and subordinated debt ratings are sensitive to the same considerations that might affect each of the bank's Long-Term IDRs. The rating actions are as follows: AUB: Long-Term IDR affirmed at 'BBB+'; Outlook Revised to Negative from Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'bbb' Support Rating affirmed at '2' Senior unsecured debt affirmed at 'BBB+'/'F2' BBK: Long-Term IDR affirmed at 'BB+'; Outlook Revised to Negative from Stable Short-Term IDR affirmed at 'B' Viability Rating affirmed at 'bb+' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB+' Senior unsecured debt affirmed at 'BB+' Subordinated debt affirmed at 'BB' NBB: Long-Term IDR affirmed at 'BB+'; Outlook Revised to Negative from Stable Short-Term IDR affirmed at 'B' Viability Rating affirmed at 'bb+' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB+' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Zeinab Abdalla Associate Director +971 4 424 1210 Committee Chairperson Eric Dupont Senior Director +33 1 44 29 9131 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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