The overbanked status of the Bahraini banking system fosters intense competition and squeezes interest margins, S&P Global Ratings noted in a report on Thursday.
Noting that numerous banks in Bahrain contrast with a small economy and bankable population, the report says Bahrain's banking system is more fragmented than most of its regional peers', leading to overcapacity and restrained risk-pricing ability for banks.
The report classified the banking sector of Bahrain as B+/Stable/B, and maintained Bahrain has a more diversified economy than its GCC peers.
However, it noted that the country's fiscal and external revenues remain strained as a result of volatile oil prices, and low gross international reserves covering less than one month's current account payments and about 40 percent of the monetary base over the first quarter of 2018.
“Banks' comparatively high, albeit decreasing, exposure to the cyclical construction and commercial real estate segments is a negative factor for our assessment, as is the high amount of non-performing and restructured loans in these segments,” it said.
Though adequate banking regulation and supervision in Bahrain supports domestic banks, high shares of customer deposits, including from local and foreign owners, and limited reliance on external debt feature prominently in retail banks' funding profiles, S&P Global Ratings said.
The report viewed Bahrain's economic risk as stable, despite the current bleak operating environment following volatility in oil prices and the continued pressure on the country's fiscal and external accounts.
“While we expect Bahrain's residential and commercial housing prices will stagnate, in our view the asset quality impact on banks will be manageable,” it added.
Nevertheless, it expects the economic growth to slow to less than 3 percent per year on average over 2018-2020 from an average of 4 percent between 2012 and 2015.
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