OREANDA-NEWS. Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of National Bank of Bahrain (NBB) and BBK B. S.C. (BBK) to 'BB+' from 'BBB-'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary.

The rating actions follow Fitch's downgrade of the Bahraini sovereign rating to 'BB+' from 'BBB-' (see 'Fitch Downgrades Bahrain to 'BB+'; Outlook Stable' dated 28 June 2016 on www. fitchratings. com). The downgrade of the two banks' IDRs reflects:

- The downgrade of the Support Ratings (SRs) and revision of the Support Rating Floors (SRFs), following the weakening of Bahrain's ability to support its domestic banks, as indicated by the sovereign downgrade; and

- The downgrade of both banks' Viability Ratings (VRs) as a result of the weakening operating environment and both banks' significant exposure to the Bahraini sovereign. In Fitch's view, it is not 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.

KEY RATING DRIVERS

IDRS, VRs AND DEBT

NBB's and BBK's Long-Term IDRs are driven by their standalone strength, as reflected by their VRs. Both BBK and NBB have a significant presence in Bahrain, and so are generally constrained by the local operating environment.

NBB's VR reflects the bank's solid capitalisation, although we view the high capital ratios in the context of a weakening operating environment, lower risk-weighted assets due to high government exposure and a concentrated balance sheet. The rating also reflects the bank's strong domestic franchise, consistent and solid profitability, generally adequate 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 concentrations in both loans and deposits, which although comparing well with GCC peers, still give rise to event risk.

BBK's VR is supported by the bank's satisfactory and resilient financial performance, despite the weakening operating environment in Bahrain. Its well-established franchise and satisfactory funding and liquidity indicators are important rating drivers. Asset quality metrics are sound. However, the VR also considers the bank's concentrated loan book, which gives rise to event risk, and its dependence on the undiversified Bahraini market. In light of balance sheet concentrations, and the weakening operating environment, Fitch considers capital as only adequate, despite the impact of the capital raised during 2Q16.

BBK's senior debt ratings are aligned with the bank's IDRs.

BBK's subordinated debt is rated one notch below the bank's Long-Term IDR, reflecting below-average recoveries.

SUPPORT RATINGS AND SUPPORT RATING FLOORS

NBB's and BBK's SRs and SRFs reflect Fitch's expectation of a moderate 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, but weakening ability to do so.

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.

RATING SENSITIVITIES

IDRS, VRs AND DEBT

Further downside pressure on the banks' VR could arise in the event of a further material worsening of the Bahraini operating environment that was reflected in a further downgrade of the sovereign rating.

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.

SUPPORT RATINGS AND SUPPORT RATING FLOORS

Downside risk to the SRs and SRFs could also arise from reduced sovereign propensity or ability to support the largest Bahraini banks.

BBK's senior and subordinated debt ratings are sensitive to the same considerations that might affect the bank's Long-Term IDRs.

The rating actions are as follows:

BBK:

Long-term IDR downgraded to 'BB+' from 'BBB-'; Outlook Stable

Short-term IDR downgraded to 'B' from 'F3'

Viability Rating downgraded to 'bb+' from 'bbb-'

Support Rating downgraded to '3' from '2'

Support Rating Floor revised to 'BB+' from 'BBB-'

Senior unsecured debt downgraded to 'BB+' from 'BBB-'

Subordinated debt downgraded to 'BB' from 'BB+'

NBB:

Long-term IDR downgraded to 'BB+' from 'BBB-'; Outlook Stable

Short-term IDR downgraded to 'B' from 'F3'

Viability Rating downgraded to 'bb+' from 'bbb-'

Support Rating downgraded to '3' from '2'

Support Rating Floor revised to 'BB+' from 'BBB-'