(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Corporate Rating for Muscat Finance S.A.O.G. (MF) on the Oman National Scale at ‘omA-’. The Short-Term rating on the same scale has also been affirmed at ‘omA2’. The Outlook on the ratings has however been lowered to Negative.

The main risk factors underpinning the revision of the Outlook to Negative are related to asset quality and profitability, together with what remains a difficult operating environment for non-bank financial companies (NBFCs). High non-performing financing receivable (NPFR) accretion in 2019 and 2020 sharply increased provisioning requirements, with this at first reducing profitability at the net level and then moving the Company into a net loss in 2020. Although asset quality has now stabilised in terms of money NPFRs, a falling loan portfolio has meant that the NPFR ratio actually rose in H1 21. Profitability however improved a little. Given the still difficult operating environment (and the high NPFR accretion in earlier periods), MF management has adopted a very cautious stance on corporate/SME credit extension – and this segment of the overall financing portfolio has been shrinking. The intention is to progressively shift the balance in the portfolio more towards consumer (vehicle) finance and this change in strategy is now bearing fruit in terms of new financings volume. Given the run off in the corporate/SME segment however, overall financing portfolio growth will take time to achieve – and the pressures on revenues will therefore continue.

The ratings are supported by a well-capitalised balance sheet in terms of ratios. Although leverage could rise were business volumes to grow, there is little sign of this being likely at present as corporate loan demand is muted and the priority for management is the repair of asset quality, rather than asset growth – except in the consumer segment. Leverage is therefore expected to remain in a comfortable range for a NBFC, as will net debt to total equity – this has been on a declining trend.

Despite some concentration in the funding base, this is to a large extent due to regulatory factors – although the banking panel is dominated by a few lenders with large lines to MF. However, management have had considerable success in increasing the level of corporate deposits, which partially offset this concentration, although the regulatory constraints on aggregate deposit levels preclude these becoming a major source of funding. Looking ahead, there are plans to widen the banking panel by adding more foreign names – although the current low level of new lending means that the immediate need for additional funding is reduced.

Despite the recent improvements, the main credit challenges for the future will remain asset quality and profitability. Although financing receivables loss coverage fully meets both IFRS 9 and Central Bank of Oman (CBO) requirements, this owes a great deal to the mitigation of provisioning requirements provided by a strong collateral position. MF and other lenders are therefore vulnerable to any deterioration in collateral valuation as this would mean a need to take additional provisions. In addition, foreclosure on and then sale of collateral can be a protracted process in Oman, although MF has reached the Execution Court stage for almost half of its non-performing assets (NPAs).

MF management is confident that asset quality is now under good control – and that future provisioning requirements should trend downwards, especially as 2022 should see some recoveries from existing loss reserves. If this turns out to be the case, it would begin to remove one of the main factors pressurising profitability. However, the other – a falling portfolio – also needs to be removed, and this may take longer.

The fall in oil prices and the consequent pressure of government finances had had a major negative impact on liquidity conditions in Oman in recent years. Covid-19 added to these pressures. However, more restrained government spending and the rises in oil prices this year has placed government finances on a more stable footing – and this has been reflected in easier system liquidity as the government is again depositing fresh funds with Omani banks. There also appears to be relief in sight on contract arrears. Failure by the government to pay some suppliers and contractors on time had impacted asset quality in the contracting sector and in the supply chain to that sector, and this, in turn, has had knock-on effects across the wider economy and on asset quality at lending institutions. A progressive clearing of these arrears would certainly improve liquidity conditions, and very possibly reduce asset quality pressures as well – although the impacts for individual lenders are likely to vary considerably.

Rating Outlook

The Negative Outlook indicates that CI expects the Long-Term rating to reduce by one notch over the next 12 months. However, management has been increasing provisioning coverage levels on a discretionary basis during H2 21 as a precautionary measure in order to stabilise asset quality metrics given the operating environment pressures and the imminent ending of forbearance measures, and this may compensate for the possibility of higher NPA accretion.

Rating Dynamics: Upside Scenario

Given the difficult operating conditions and the existing pressures on both asset quality and profitability, an upward revision in the Outlook is currently seen as being the most likely possibility. For this to happen, the Company would need to demonstrate – and maintain over time – significantly improved asset quality and profitability.

Rating Dynamics: Downside Scenario

The current ratings may fall by more than one notch should asset quality worsen significantly or should losses again be posted. While CI would expect to see MF to continue to provision appropriately (given IFRS 9 and the stricter CBO requirements this should be automatic), the immediate impact of any decline in asset quality would be to reduce both net profitability and internal capital generation. Another possible source of downward pressure could come from funding availability (and pricing), although the currently easier liquidity situation in Oman reduces the likelihood of this being a problem.

Contact

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 FY2017-20 and H1 2021. 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.

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