Moody's downgrades Bahrain's banking sector outlook

Decreasing oil revenues in Bahrain caused Moody's to recently downgrade the Gulf nation’s banking outlook from stable to negative, while still finding positives in the non-oil economy that should keep banks somewhat stable and liquid.

Moody’s economists expect Bahrain’s economic growth to be cut nearly in half from 4.5 percent last year to an expected 2.7 percent in 2015. The slowdown in economic growth, resulting from lower oil prices, will weigh on the banks' profitability over the coming year.

Moody’s new report isn’t all bad news for Bahrain’s banks, though. Analysts see strong liquidity and large capital buffers that should provide a level of financial flexibility that will allow Bahraini banks to adapt to lower profits.

Bahrain will continue to receive financial assistance from other Gulf countries, which should lessen the impact. There is also a degree of resilient growth expected in Bahrain's more diversified non-oil economy, which means the impact of lower oil prices should prevent the risk of any severe deterioration in banking sector performance.

Still, Moody's forecasts a small rise in non-performing loans (NPLs), although the ratio of NPLs is expected to remain stable overall as Bahrain’s banks continue efforts to recover and write-off legacy problem loans.

If Bahraini banks weather the storm well over the next 12 to 18 months, prospects for an upgrade back to stable are good.