Dubai: Loan quality at Bahraini banks will likely come under moderate pressure over the next 12 to 18 months as rating agency Moody’s see a slight uptick in new non-performing loan (NPL) formation, stemming from the formation of new delinquencies in the weaker economic environment.

“We expect that the impact of the weakening of Bahrain’s economy on Bahraini banks’ asset quality will become visible in the second half of 2015. Loan-loss provisions, at 0.8 per cent of gross loans during 2014, will likely start to pick up due to higher NPL formation. We do not expect the recovery and write-off of legacy NPLs to completely offset this, as their provisioning level already captures banks’ recovery expectations,” said Christos Theofilou, an analyst with Moody’s.

Domestic loan growth is expected to remain stable at around 4 per cent a year, similar to the two previous years with private-sector business loans showing steady growth supported by spending related to the GCC-funded infrastructure projects.

Personal loan growth will likely weaken following a 25 per cent increase over the past two years and due to an unlikely hike in government salaries.

NPLs at Bahraini banks are relatively high compared with most GCC peers, despite some recent improvement. NPLs at rated retail banks range widely from 5 per cent to 17 per cent of gross loans, reflecting differing risk appetites and underwriting standards. However, the average NPL ratio for the Bahraini banking sector is seen in the range of 6-6.5 per cent of total loans by mid-2016.

Individual banks’ NPL levels will depend on their respective success in recovering or writing off legacy problem loans.

“We project that loan-loss reserves will remain broadly stable over the outlook period [next 12 to 18 months]; they stood at around 69 per cent of NPLs as of year-end 2014. Although this level remains low compared with other GCC countries [the GCC average is around 90 per cent], it reflects the high property component held by banks as collateral,” Theofilou said.

In the retail sector, personal loans (including mortgages) accounted for 42 per cent of domestic loans as at the end of December 2014. Moody’s expects moderate asset quality pressure by the second half of 2015, stemming from the combination of stable government salaries and muted retail loan growth.

In the corporate sector, high concentrations of loans to single borrowers pose credit risks. The rating agency estimates that exposure to the top 20 companies amounts to between 150 per cent and 250 per cent of banks’ Tier-1 capital; a large single-party default could trigger an abrupt deterioration in asset quality.

In terms of capitalisation, Bahraini banks are in line with their GCC peers. Their aggregate Tier-1 capital ratio stood at 12.7 per cent at the end of December 2014, and their tangible common equity to total assets stood at 12.3 per cent as of December 2014.