Moody's downgrades Bahrain Islamic Bank's supported ratings to Ba3 with a negative outlook


Moody's has downgraded Bahrain Islamic Bank's (BisB) supported issuer ratings to Ba3 / Not Prime from Ba1 / Not Prime. In addition, Moody's confirmed the Bank Financial Strength Rating of BisB at E+, but changed its mapping on the long term scale to B3 from B1. All ratings carry a negative outlook. This rating action concluded the review for downgrade initiated on 1 June 2011.

Rating Rationale

Standalone Ratings

The re-mapping of the BCA to B3 from B1 reflects

(i) The recently aborted merger with Al-Salam Bank (ASBB). The bank faces renewed uncertainty regarding its future capital position. In our central scenario and taking into account expected losses on both financing and investment books, we estimate that the bank needs around BHD 40 million of fresh capital to repair its balance sheet. A merger of these two banks would have been credit positive for BIsB given the stronger capital base of ASBB.

(ii) Severe asset quality weakness since 2010. Non-Performing Loans (NPL) have stabilized at around 34% in 2011. BIsB's extremely high level of problem loans was the result of two major factors. First, BIsB geographically diversified outside its home market and took concentrated corporate exposures to three heavy regional borrowers that all defaulted during the financial crisis (Saad, AlGosaibi, The Investment Dar). Secondly, BIsB had around 30% of the financing book exposed to the local real estate market.

(iii) Diminished earnings capacity and continued losses. Social unrest in Q1 2011 in Bahrain led to a slowdown in activity in the Kingdom, especially in some sectors such as construction and real estate to which BisB is heavily exposed. Poor earnings and heavy provisioning charges have driven the bank's net profits into negative territory for the third year in a row in 2011.

Issuer Rating

BisB's supported issuer ratings were downgraded to Ba3 from Ba1 as a consequence of the re-mapping of the BCA to B3 from B1. The significant three-notch rating uplift incorporates our view that Bahraini authorities would likely support BisB's depositors in case of need due to the importance of BisB as the largest Islamic lender in the Kingdom of Bahrain.

What could change the ratings down

BisB's standalone ratings would come under pressure in case of (i) large and sudden withdrawals of customer deposits resulting from a loss of market confidence in the bank and/or (ii) a continued deterioration in the operating environment in the Kingdom of Bahrain.

BisB's issuer ratings could be downgraded if (i) standalone ratings were downgraded and/or (ii) the Central Bank of Bahrain failed to provide timely support to the bank in case of need or signalled any reduction in support for the banks in the country.

The negative outlooks placed on BisB's ratings express our view that a further downgrade of the bank's ratings in the next 12 to 18 months is possible.

What could change the ratings up

The bank's standalone ratings could be upgraded in case the bank receives a significant capital injection or merges with a stronger institution, thus covering its expected losses.

The bank's issuer ratings could be upgraded in case standalone ratings are upgraded or explicit and stable support mechanisms are put in place by the Central Bank of Bahrain or other governmental authorities that materially reduce the risk of insolvency.

An upgrade of BisB's ratings is unlikely in the rating horizon as indicated by the negative outlooks on BisB's ratings.

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology, published in February 2007 and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

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