Bahrain Mirror (Reuters): Fitch Ratings has revised the Outlook on National Bank of Bahrain (NBB) and BBK B.S.C. (BBK) to Negative from Stable, while affirming their Long-term Issuer Default Ratings (IDRs) at 'BBB-'. A full list of rating actions is available at the end of this rating action commentary. The rating actions follow Fitch's revision of the Outlook on the Bahraini sovereign rating to Negative from Stable (see Fitch revises Bahrain's Outlook to Negative; Affirms at 'BBB-' dated 4 December 2015 on www.fitchratings.com). 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. KEY RATING DRIVERS IDRS, VIABILITY RATINGS AND DEBT NBB's and BBK's Long-term IDRs are driven by their standalone strength as reflected in their VRs. The loan books of each of the Fitch-rated Bahraini banks have different geographic risk profiles as a result of their different business models and strategies. 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. BBK's VR is supported by the bank's satisfactory and fairly resilient financial performance, despite the uncertain operating environment in Bahrain. Its well-established franchise and satisfactory funding and liquidity indicators are important rating drivers. The VR also considers the bank's concentrated loan book and its dependence on the undiversified Bahraini market. 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 RATING AND SUPPORT RATING FLOOR 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. RATING SENSITIVITIES IDRs, VRs, SRs, SRFs AND DEBT 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. Downside risk to the SRs and SRFs could also arise from reduced sovereign propensity 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 affirmed at 'BBB-'; Outlook revised to Negative from Stable Short-term IDR affirmed at 'F3' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB-' Senior unsecured debt affirmed at 'BBB-' Subordinated debt affirmed at 'BB+' NBB: Long-term IDR affirmed at 'BBB-'; Outlook revised to Negative from Stable Short-term IDR affirmed at 'F3' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB-'.

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