Moody's Investors Service has assigned speculative-grade ratings to two Gulf offshore banks, Bahrain International Bank (BIB) and Bahrain Middle East Bank (BMB). Its assessment says the banks are well-managed and well-capitalised, but their small size, location and diverse shareholder base are potential weaknesses.

Both banks were assigned long-term debt and deposit ratings of Ba2 and short-term ratings of Not Prime, as well as financial strength ratings of D. The latter is about average for Gulf banks rated by Moody's to date. BIB's rating is lower than the stand-alone rating of B assigned to it by European agency IBCA.

Moody's noted that both banks are profitable and have spread their risks by investing outside the Gulf and replacing some interbank funding with securities issues. But it says both are small, making it hard for them to build up a solid investment banking franchise, while their diverse shareholder bases and lack of a lender of last resort could make it hard to get support from third parties in a stress situation.

BMB's general manager Albert Kittaneh says he is pleased that his bank's rating, which was unsolicited, is in line with its peers, given poor results in the early 1990s. However, he says that in the past some of BMB's shareholders have proved willing to provide funds when needed, and that the bank has a small exposure to the interbank market, with only $5 million in net interbank liabilities. 'I don't agree with Moody's negative view of Bahrain,' he adds,'It isn't fair to penalise the bank for being offshore and also consider it onshore [for the assessment of some risks associated with Bahrain].'

A third offshore bank in Bahrain, TAIB Bank, has had a rating upgrade from Cyprus-based bank rating agency Capital Intelligence. The bank's long and short-term ratings were upgraded to BBB- and A2 from BB+ and A3, reflecting a strengthening of its funding profile, profits and asset quality in 1996 (Banking, MEED Special Report, 20:11:96, page 13).