“The outlook revision reflects our updated and slightly more positive opinion of BMI’s asset quality and financial performance. The revision is also supported by our anticipation of a more supportive operating environment in Bahrain in 2013,” S&P in a statement said.
“BMI continued to incur new problem loans in 2012, but at a significantly lowers pace than in preceding years. Its gross nonperforming loan (NPL) ratio had dropped by about four percentage points to about 20% of total loans on Dec. 31, 2012. We acknowledge that the ratio is being helped by the “denominator effect” because of the rapid growth of customer loans in 2012, but we also believe the bank’s underwriting skills have been improving while the domestic environment has gradually become more supportive. We expect asset quality to remain fairly stable over the coming 12-18 months. Consequently, we have revised our assessment of the bank’s risk position to moderate from weak,” it added.
“BMI’s financial performance improved slightly in 2012, and the bank posted profits for four consecutive quarters. This was mainly attributable to lower provisions but also to a faster pace of loan growth than we had anticipated. We expect the bank to maintain significant asset growth in 2013. Although this asset growth will support its bottom-line earnings, the bank’s internal capital generation remains very weak. We therefore expect BMI’s capitalization to weaken at a faster pace than we previously expected. Accordingly, we are revising our assessment of its capital and earnings to adequate from strong. Our risk-adjusted capital (RAC) ratio before adjustments for the bank, which we project will be slightly below 10% in the coming 12-18 months, also supports our view.”
“The starting point for our ratings on BMI is its ‘bb+’ anchor. The stand-alone credit profile (SACP) is ‘b+’ after incorporation of the bank’s specific factors. The long-term rating on the bank is three notches above its SACP, reflecting BMI’s strategic importance to its largest shareholder, Oman-based BankMuscat S.A.O.G.”
“The stable outlook reflects our view that BMI’s asset quality and earning metrics will stabilize at current levels. It also draws on our expectation that lending will continue to grow at a significant pace in 2013. This, coupled with lower provisioning than we had expected should help the bank keep its bottom-line earnings in profit–although still insufficient for internal capital generation to improve. According to our base-case scenario, our RAC ratio before adjustments will drop below 10% over the next 12-18 months,” S&P in a statement said.
“We could take a negative rating action if BMI failed to maintain its current asset quality and financial performance. This could stem from a significant underperformance of the bank’s restructured or unseasoned loans compared with what we expect. We could also reduce the number of notches of uplift, and ultimately the ratings on BMI, if we perceived that BankMuscat had become less likely to provide extraordinary support to BMI in case of need.”
“A positive rating action is unlikely over the foreseeable future, as it would necessitate a substantial improvement in the bank’s income generation,” the statement added.