Moody's Investors Service has today changed the outlook for Bahrain's banking system to negative from stable, reflecting the rating agency's view that a slowdown in economic growth, resulting from the impact of lower oil prices, will weigh on the banks' funding and profitability over the coming 12-18 months.

Nevertheless, Moody's also considers that the banks' strong liquidity and capital buffers will continue to provide financial flexibility to adapt to these conditions.

Moody's new report, entitled "Banking System Outlook: Bahrain", is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

Moody's expects slower economic growth of 2.7% in 2015 (from 4.5% in 2014) in Bahrain (Baa3 negative), owing to the impact of lower oil prices and associated lower government revenues and spending, which will dampen operating conditions and weigh modestly on banks' funding and profitability.

At the same time, the banking system's credit profile will remain closely linked to the weakening fiscal position of the government, as direct holdings of government securities and loans, which currently represent over 2x the banks' equity, are likely to increase further, says Moody's.

However, financial assistance from other Gulf countries and fairly resilient growth expected in 2015 for Bahrain's relatively diversified non-oil economy will help soften the impact of lower oil prices and moderate the risk of any severe deterioration in the banks' performances.

In this context, Moody's forecasts a modest increase in the formation of new non-performing loans, although reported NPL ratios should remain broadly stable as a result of the banks' ongoing initiatives to recover and write-off legacy problem loans.

The rating agency also notes that Bahrain's banks will maintain strong liquidity and capital buffers, which will provide them with financial flexibility to adapt to the impact of lower oil prices, says Moody's.