Global Arab Network | Fitch Affirms 4 Omani Banks' IDRs; Downgrades Individual Ratings of 3 Banks

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Fitch Affirms 4 Omani Banks' IDRs; Downgrades Individual Ratings of 3 Banks

Global Arab Network - - George Haddad

Wednesday, 16 September 2009 12:39

Fitch Ratings has today affirmed the Long-term IDRs of Omani-based Bank Dhofar (BD), Oman Arab Bank (OAB) and Oman International Bank (OIB) at 'BBB+' and Bank Muscat (BM) at 'A-'; all with Stable Outlook. The agency also downgraded the Individual Ratings of BD, OIB and OAB to 'C/D' from 'C' while affirming BM's Individual Rating at 'C'. A full breakdown of the rating actions is provided at the end of this commentary.

The four Omani banks' Long- and Short-term IDRs reflect the high probability of support from the Omani authorities, if need be. Fitch bases this view on the above banks' systemic importance to the Omani banking system and the Omani authorities' strong history of support. The IDRs are unlikely to change unless Fitch's view on the sovereign changes.

The downgrade of the Individual Ratings of BD, OAB and OIB reflects Fitch's view that they are exposed to a number of negative trends. Although BM is exposed to these negative trends, this is balanced by its dominant local franchise.

Fitch expects asset quality at these banks to deteriorate, albeit from current fairly sound levels, as the Omani operating environment becomes more challenging and loans season following a period of rapid growth for most banks prior to 2009. The global recession and lower oil prices have led to a slowdown in the Omani economy and GDP growth is forecast to decline to around 4% in 2009 (2008: 12.3%). OIB has strengthened its management team but suffered from high turnover in senior management prior to 2009, which may have contributed to its declining market share. Fitch notes that while OIB's growth has been slow compared with peers', this could mean that it is less exposed to certain sectors that are more susceptible to the current downturn. The agency believes that the four Omani banks are exposed to high leverage in their increasing retail lending (see Fitch report: "GCC Banks: Risks from Retail Lending"). Fitch notes that the four banks' risk management systems have, to varying degrees, not kept pace with the times. Liquidity has tightened and funding is under pressure in the Omani banking system, reflected in higher balance sheet leverage and loan/deposit ratios at these four banks in H109, although most also hold sizeable liquid assets.

Profitability and performance ratios, which were mainly driven by rapid loan growth in recent years, deteriorated in H109 to varying degrees amongst the four rated Omani banks. In H109, BM suffered significantly higher impairment charges, mainly due to exposure to the troubled Saad and Algosaibi groups in Saudi Arabia, which resulted in weakened, albeit adequate, asset quality. Fitch expects profitability at these banks to remain adequate, but for performance ratios to continue their downward trend as credit costs rise and business volumes decline.

Credit is the main risk for Omani banks; relatively high borrower concentration remains a concern as a few large problematic exposures could result in significant asset quality deterioration, as has been the case in the region. The agency also highlights the risks arising from increasing retail lending given the high debt burden ratios and salary multiples that are common in the Omani market. Omani banks' overall exposure to market risk is low and additional impairments on investments (if any) should be comfortably absorbed by core banking revenues. The Omani property market has seen some drop in valuations from the peak in 2008, although not to alarming levels.

Funding is primarily sourced from customer deposits with BM being the most active bank in the debt capital markets amongst Omani banks. Fitch notes that a large part of customer deposits in Oman, although contractually short-term, tend to roll over. Nevertheless, funding has come under pressure from increasing competition for customer deposits and reduced liquidity in the local banking system. Fitch notes that BD's loan growth (H109: 16% annualised; 2008: 43%) was particularly high, which has resulted in tightened liquidity at this bank. However, the agency gains comfort from the Omani authorities' liquidity support to the banking system. Capitalisation is adequate for all the four Omani banks and regulatory capital ratios comfortably exceed the 10% required by the regulators. Fitch expects capital ratios to remain broadly at the same levels as lower internal capital generation should be countered by slower growth in risk-weighted assets.

Global Arab Network

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