Bahrain’s banking sector has a negative outlook over the next 12-18 months because the economic slowdown will continue to challenge asset values and business volumes, according to ratings agency Moody’s.

According to its latest Banking System Outlook for Bahrain, Moody’s expects that “the difficult credit and business conditions will continue over the next few months”.

It adds that the slowdown elsewhere in the GCC, and difficulties in the wholesale funding market will also put pressure on Bahrain’s banks. The main dangers are increases in non-performing loans, particularly through exposure to the construction and real estate sectors.

More positively, though, the agency says the “robustness of Bahrain’s regulatory and supervisory regime”, coupled with ample capital levels in the rated Bahraini retail and wholesale banks, means the sector should be able to absorb credit losses without having to raise more capital.