(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Corporate Rating on the Oman National Scale of National Finance Company SAOG (NFC) at ‘omA-’, and the Short-Term Corporate Rating on the same scale at ‘omA2’. The Outlook on the ratings remains Stable.

Credit strengths that support the rating include NFC’s status as the largest non-bank financing company (NBFC) in Oman, a good management team, and strong and supportive Ominvest ownership. The Company is soundly capitalised, well managed and has a well-diversified funding base from Omani and foreign banks. The main credit challenge for all Omani financial institutions has however been what was until recently an increasingly difficult operating environment due to lower oil prices and the impact of Covid-19. More recently, stronger oil prices and improved budgetary discipline have considerably improved prospects for both the operating environment and financing demand while Covid-19 has receded as a negative factor for economic activity. The narrowness of NFC’s business model is also a credit challenge, but one that reflects the regulatory limits on all NBFCs on both sides of the balance sheet. With the improving operating environment, this is now the principal credit challenge.

Lower government spending (and the continued backlog of payments to some suppliers and contractors) impacted cash flows and, therefore, asset quality in the contracting sector – and in the supply chain to that sector. In contrast, the consumer segment has been more resilient, especially those Omanis employed by the government or ‘Grade A’ corporates. Demand for consumer credit remains buoyant and NFC is shifting is financing growth focus towards this segment. As long as loan demand strengthens, management expect to be able to again grow the financing portfolio, and raise a leverage level that is too low to support stronger operating profitability.

While asset quality has stabilised and is now appearing to improve at NFC (as is credit loss absorption capacity), the other main credit challenge remains the structural reliance on short-tenor bank funding. Although the ending of forbearance measures at the end of this year may produce some pressure on asset quality metrics for all lenders in Q2 22, NFC management believes that it has sufficiently prepared for this by stricter judgmental staging classifications and collateral valuation haircuts.

Despite a system wide tightening of liquidity in 2020, NFC enjoyed a comfortable funding position. All of the main banking lines were retained and in some cases expanded. More recently the number of FX-denominated lines from foreign lenders has been expanding, as have the number and breadth of corporate deposits. Leverage also remains comfortable, although management would like to see it rise a little from the rather conservative current levels.

Earnings are still neither a credit strength nor credit challenge at present. Although funding costs and financing differential have stabilised, operating profitability remains under some pressure – something that lending growth would rapidly alleviate. At the net level too, ROAA has been slipping despite lower provisions in money terms. While it remains satisfactory in absolute terms, it is much lower than in 2017-18.

Rating Outlook

The Stable Outlook indicates that NFC’s ratings are unlikely to change over the next 12 months unless there is a significant change in the operating environment – something which is not expected at this point.
 
Rating Dynamics: Upside Scenario

While an upward adjustment in the ratings is seen as being unlikely at present due to regulatory constraints and their impact on the business model, it remains possible that a significant improvement in asset quality metrics and reduced concentrations in the funding base could put upward pressure on the ratings.

Rating Dynamics: Downside Scenario

NFC’s ratings could be either placed on a Negative Outlook or lowered by one notch if Oman’s sovereign ratings were to change. In the absence of such a sovereign action, the Company’s ratings could still be reduced should earnings performance decline sharply and balance sheet metrics worsen significantly in terms of asset quality and funding – although such a deterioration is not seen as being likely at this time.

Contact

Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: rory.keelan@ciratings.com
Secondary Analyst: Agnes Seah, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2018-20 and H1 21. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity 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 principal methodologies used to determine the ratings are the Corporate Rating Methodology (see and the National Scale Ratings Criteria for Oman, dated 22 February 2018 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at

This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in August 2017. The ratings were last updated in March 2021. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.

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