The Bahrain-based BMI Bank has had its long-term rating lowered to BB from BB+ by US-based rating agency Standard & Poors (S&P), due to its merger with Al-Salam Bank.
The agency gave the bank a stable outlook.
BMI Bank is now a fully owned subsidiary of Bahraini Al-Salam Bank, following the merger on 31 March.
The consolidation of the two banks has created the second-largest Islamic bank in Bahrain, with an asset base of $5bn and a capital base of $308m.
S&P lowered the rating due to Al-Salam Banks visibly lower credit profile than that of the Oman-based bank Bank Muscat, the previous main shareholder of BMI Bank.
BMI Bank will continue to operate as a separate entity for the next two to three years under its own brand name. This is to fulfil regulatory requirements as the bank begins to convert to an Islamic institution.
S&P says the banks systems and policies have already been integrated into Al-Salam Banks structure.
The agency also states that despite the lower rating, in the long-term, the merger could benefit the two institutions due to giving the consolidated bank stronger capitalisation and better asset quality.
There is increasing consolidation within the Islamic banking sector in Bahrain, with several banks completing mergers last year.
Last December, Ibdar Bank was launched, after Bahraini institutions Capivest, Elaf Bank and Capital Management House merged.