Oman Arab Banks Ratings Lowered and Outlook Revised to Negative

(MENAFNEditorial) 19th May 2016 Oman Arab Bank's Ratings Lowered and Outlook Revised to 'Negative' Capital Intelligence Ratings (CI Ratings), the international credit rating agency, following the very recent downgrade of the Sultanate of Oman's sovereign rating, has lowered Oman Arab Bank's (OAB) Financial Strength Rating (FSR) to 'BBB' from 'BBB+'. The downgrade is based on the ongoing and highly negative impact of the lower oil prices on Oman's fiscal and economic strength and its effect on the operating environment, as well as the sovereign's ability to support the banking system. The Bank's rating is supported by the generally good financial metrics in terms of its sound Basel III capital adequacy ratio (CAR) and the sustained improvement in loan asset quality indicators. The rating also reflects the Bank's strong corporate franchise and large customer deposit base. OAB's rating is however constrained by the high level of special mention loans, together with the likelihood that the robust loan growth over the past few years may translate into increased non-performing loans (NPLs) in the face of a challenging operating environment. The fairly high customer concentration in both loans and customer deposits and the declining trend of both operating and net profitability are other constraining factors. OAB's Foreign Currency Ratings are also lowered to 'BBB' Long-Term and 'A3' Short-Term. Taking into account the ownership, management and support of Arab Bank Jordan, the Support Level is maintained at '2', reflecting the high likelihood of support from its relatively sound major shareholders, as well as the government. A 'Negative' Outlook is also assigned to all the ratings as is the case with its peers. The 'Negative' Outlook largely reflects the weakening of the operating environment for banks as indicated by the slowdown of economic growth, as well as the potential impact on loan asset quality going forward, the possible tightening of market liquidity given the issuance of government bonds and treasury bills and reduced consumer confidence. A weakening of related ratios would thus exert further downward pressure on the Bank's ratings. In line with the economic slowdown, asset growth moderated in the year under review âˆ' although loan expansion remained robust. The latter resulted in a noticeable tightening of liquidity ratios in 2015. While they remained better than the peer group average, these ratios are a little on the high side. However, the tighter liquidity position is mitigated to some extent by the fact that the Bank has no interbank borrowings, it maintains a comfortable maturity profile, and it continues to be supported by the sizeable standby credit line from Arab Bank which they have yet to utilise. The Bank's loan asset quality on the other hand showed sustained improvement, although key indicators remained weaker than the peer group average. With the more challenging operating environment and the seasoning of the loan book which has grown robustly over the past few years, NPLs are anticipated to rise in the coming quarters. A constraining factor, which is in common with its peers, is the high concentration in both its loan portfolio and customer deposit base. With the continued growth of risk weighted assets, OAB's Basel III capital ratios registered a further decline in the year under review. While they remained at a fairly sound level at end 2015, the Bank's total CAR and Tier 1 ratios were lower than the peer group average. In 2015, OAB's operating and net profitability ratios registered a further decline, although this trend mirrored that of most of its peers and the sector, and is a reflection of the high competition in a relatively small market. The narrowing of net interest margin and its relatively high operating cost base, as well as higher cost of risk continued to constrain earnings growth.   OAB was established in 1984 after it acquired the Omani branches of Arab Bank. Arab Bank subscribed to 49% of OAB's share capital and Omani shareholders took 51%. Arab Bank manages OAB and is closely involved in the running of the Bank. The Bank's local shareholder is Ominvest, the country's oldest investment company, whose shares are widely held by Omani individuals and enterprises; OAB itself owns 5% of shares. OAB is the only major commercial bank that is not listed in Oman. Plans for an IPO have been shelved indefinitely. At end 2015, the Bank had assets totaling OMR2.0 billion (USD5.2 billion) and an equity base of OMR226mn (USD588mn). It reported a net profit of OMR29.0mn (USD75mn) in 2015, representing a modest 2.2% growth over the year earlier. CONTACT Primary Analyst Agnes Seah Senior Credit Analyst Tel: +357 2534 2300 E-mail: agnes.seah@ciratings.com Secondary Analyst Karti Inamdar Senior Credit Analyst E-mail: karti.inamdar@ciratings.com Rating Committee Chairman Rory Keelan Senior Credit Analyst The information sources used to prepare the credit ratings are the rated entity and public information. CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process. The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in August 1987. The ratings were last updated in May 2015. The principal methodology used in determining the ratings is Bank Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu.