Bahrain Mirror: Fitch Ratings has revised Bahrain Mumtalakat Holding Company's (Mumtalakat) Outlook to Negative from Stable and affirmed the Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'.

The rating actions follow Fitch's revision of Bahrain's Outlook to Negative from Stable and the affirmation of its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively on 4 December 2015.

Fitch Ratings has recently revised the Outlook on National Bank of Bahrain (NBB) and BBK B.S.C. (BBK) as well to Negative from Stable, while affirming their Long-term Issuer Default Ratings (IDRs) at 'BBB-'.

It has also changed Bahrain Telecommunications Company's (Batelco) Outlook to Negative from Stable while affirming its Long-term Issuer Default Rating (IDR) at 'BBB-'.

Mumtalakat

State Support Mumtalakat's ratings factor in implicit state support, although this is subject to change given the political uncertainty in Bahrain.

Mumtalakat is 100%-owned by the Bahrain state and is the government's investment arm. It was established in June 2006 as an independent holding company for the government's non-oil and gas assets.

The viability of Mumtalakat's business model is dependent on continued strong linkages with the sovereign, its strategic importance as a holding company for the government's non-oil and gas assets, and its low leverage relative to Bahrain's financial capacity.

In line with Fitch's "Parent and Subsidiary Rating Linkage" methodology, Mumtalakat's ratings are aligned with the Kingdom of Bahrain's (BBB-/Negative/F3), reflecting their strong relationship. Mumtalakat is an active investor on behalf of the state in diverse industry sectors spanning over 35 commercial enterprises, nationally and internationally. State Funding Mumtalakat has received government shares in state-owned enterprises since its inception, as well as funds and free land to manage and operate its subsidiaries. Although government support falls short of an explicit debt guarantee, Fitch considers Mumtalakat's high profile and strategic role to mean that support would be provided, if needed.

National Bank of Bahrain (NBB) and BBK B.S.C.

The revision of the Outlooks on the two banks' IDRs reflects (1) the increased likelihood of a downgrade of the Support Ratings (SRs) and Support Rating Floors (SRFs) following the weakening of Bahrain's ability to support its domestic banks, as indicated by the Negative Outlook on the sovereign rating as well as (2) an increased likelihood of a downgrade of both banks' Viability Ratings (VRs) if the operating environment weakens.

The domestic retail banks, BBK and NBB, have a significant presence in the domestic market, and so are generally constrained by the local operating environment. NBB's VR reflects the bank's strong capitalisation, which we expect to remain a strength despite some expected weakening in the event of future asset growth. The rating also reflects the bank's leading domestic franchise, consistent and solid profitability, generally healthy asset quality despite a fairly high headline impaired loan ratio, and sound liquidity. It also considers NBB's reliance on a small and competitive domestic environment and high concentrations in both loans and deposits.

Fitch also stated that satisfactory funding and liquidity indicators are important rating drivers, adding that the VR also considers the bank's concentrated loan book and its dependence on the undiversified Bahraini market. 

NBB's and BBK's SRs and SRFs reflect Fitch's expectation of a high probability of sovereign support from the Bahraini authorities, if required. Our view of support is based on the banks' systemic importance as major retail and corporate banks in Bahrain, and the Bahraini authorities' high propensity to support domestic commercial banks. The Bahraini government holds significant stakes in both banks: 32% at BBK and Bahrain Mumtalakat Holding Co (the investment arm of the Government of Bahrain) holds a 44.2% stake in NBB, which also is a factor in Fitch's view on sovereign support.

A downgrade in Bahrain's sovereign rating would be mirrored in all ratings. The VRs would be downgraded, as it is Fitch's view that it would not be appropriate to assign either bank a VR above the Bahraini sovereign, due to both NBB and BBK being domestic banks with significant exposure to the sovereign and the domestic operating environment.

At the same time NBB's and BBK's SRs and SRFs would also be downgraded and revised lower, respectively, to reflect a weakening of the Bahraini authorities' ability to provide support. The IDRs would be downgraded as a consequence of both VRs and SRFs being downgraded and lowered, respectively. In addition, downside risk to NBB's VR may arise from further deterioration in asset quality. Downside risk to BBK's VR could also arise if asset quality or capitalisation considerably weakens from current levels.

Political Solution

For the sovereign rating of Bahrain, Fitch outlined the following sensitivities in its rating action commentary of 4 December 2015: The main factors that could lead to a downgrade are: - Failure to reduce the fiscal deficit sufficient to stabilise the government debt-to-GDP ratio. - Severe deterioration of the domestic security situation. The rating Outlook is Negative.

Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to positive rating action: - Implementation of fiscal measures which reduce the budget deficit and are consistent with the stabilisation and then decline of the government debt-to-GDP ratio in the medium term. - A broadly accepted political solution that eases political unrest. - A recovery in oil prices that improves public finances.

Fitch further stated that the future developments that may, individually or collectively, lead to positive or negative rating actions include: - A change in Bahrain's sovereign ratings, would likely lead to a change in Mumtalakat's ratings. Any further sovereign downgrade would result in Fitch reassessing the current alignment of the parent and subsidiary's ratings. This may result in multiple notching down of Mumtalakat's rating from the sovereign's rating, reflecting the reassessment of the sovereign's capacity to provide support under an adverse scenario. - Any adverse change in the implied support of, commitment from, and ownership by the Bahrain government. - Substantial new debt on behalf of Mumtalakat subsidiaries or further guarantee of subsidiaries' debt.

Fitch Ratings, a subsidiary company of Fitch Group, is a global leader in credit ratings and research. With its headquarters based in New York, Fitch Ratings is completely owned by Hearst.

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