(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Bank Muscat (BM) at ‘BB’ and ‘B’, respectively. At the same time, CI Ratings has affirmed BM’s Bank Standalone Rating (BSR) of ‘bb’, Core Financial Strength (CFS) rating of ‘bbb’ and Extraordinary Support Level (ESL) of Moderate. The Outlook for both the LT FCR and BSR is Stable.
The Bank’s BSR is derived from a CFS rating of ‘bbb’ and an Operating Environment Risk Anchor (OPERA) of ‘bb-’, but remains constrained by Oman’s sovereign ratings (‘BB’/‘B’/Stable). OPERA denotes moderate risk and takes into account the improving macroeconomic environment due to higher oil prices.
Key credit strengths supporting the Bank’s BSR and CFS are its strong and improving capital ratios, resilient and good loan asset quality metrics, and sector best profitability metrics. The ratings also reflect BM’s flagship status and dominant market share, its strong customer and business franchises, and deep base of customer deposits with a high level CASA deposits. The well regulated environment and prudent policies of the Central Bank of Oman (CBO) also support BM’s ratings and those of other Omani banks.
The main constraints to the Bank’s ratings, in common with its peers, are high Stage 2 loans which include a rising level of restructured loans, and the moderately high customer concentration in both the loan book and deposit base. This concentration is largely due to the small size of the Omani market and the high level of government deposits in the banking system. A continuing challenge for the Bank and the sector is the still elevated credit risk environment as evidenced by the high level of Stage 2 loans in the banking system (partly attributable to the regulator’s stringent standards), and the increased geopolitical risk relating to the conflict in Ukraine and its potential impact on the world economy and hydrocarbon prices. That said, the recent increases in hydrocarbon prices could further improve Oman’s fiscal position.
Notwithstanding its commitment to assist its clients through the pandemic in line with CBO directives, BM continues to exhibit good loan asset quality metrics. Having increased at a moderate pace, Stage 3 loans declined in Q1 22, suggesting that credit conditions are starting to improve. The Stage 3 loan ratio remained fairly low and there was a further strengthening of the more than full loss coverage ratio. These metrics were the best in the peer group at end-2021.
Stage 2 loans continued to represent a fairly high proportion of gross loans despite the decline in Q1 22. The Bank’s high Stage 2 loans were in common with its peers and the sector, and remains an area of some concern. That said, CI continues to derive comfort from the Bank’s prudent lending policies. Furthermore, the ongoing economic recovery and improved business sentiment augur well for loan asset quality going forward. The Bank’s strong capital base provides an effective buffer, while its sound and resilient earnings is also expected to continue to support good risk absorption capacity. Omani banks generally have a much higher level of Stage 2 loans compared to other banks in the region due to the CBO’s stricter classification norms.
BM’s solid capital ratios are considered a key strength. Despite some slippage in Q1 22, they had strengthened for the fourth consecutive year in 2021 and were the strongest in the peer group. The quality of capital is also very good with high CET-1 and Tier 1 components. Both balance sheet leverage and Basel III leverage ratios inched up to even higher levels at end-2021. Internal capital generation improved but remained fairly modest due to a still high dividend payout ratio despite the noticeable decline in 2021.
Another key strength of the Bank is its deep customer deposit base. BM’s deposit gathering capability remains strong and is supported by the largest branch network in the country, as well as its status as the government’s flagship bank. With customer deposit expansion staying ahead of loan growth, loan-based liquidity ratios improved – although the net loans to customer deposits ratio remained a little overstretched at end Q1 22. The latter is a common feature of Omani banks, reflecting the relatively low savings rate in the country despite some recent improvement. The customer deposit mix was good with a high level of CASA. However, in common with its peers and the sector, a vulnerability relating to large government deposits remains. The latter is mitigated by the historical ‘stickiness’ of these deposits. Moreover, vulnerability to government withdrawal risk has also reduced with the improving fiscal position of the sovereign, in line with the rising oil price. Wholesale funding was at an acceptable level at end Q1 22, and refinancing risk is considered moderate given the Bank’s sound debt profile and access to capital markets. Other key liquidity metrics also remained better than the ratios of many peers.
BM’s earnings performance rebounded in 2021 with a sizeable increase in net profit. This was aided by good growth in both net interest income (NII) and non-interest income (non-II). The increase in NII was supported by credit extensions and a slightly wider net interest margin , which was also the best among its peers. The rebound of non-II was contributed by the sharp rise in fee-based income due to the resumption of fees waived during the pandemic and an increase in business activities following the easing of lockdown measures. Good operating efficiency and a decline in impairment charges contributed to a strong increase in net profit in 2021. The Bank’s profitability ratios improved and were the best among local banks, but remained a little behind pre-pandemic levels.
Earnings in the first three months of this year were weaker y-o-y given a decline in operating income and higher operating expenses. A much lower impairment charge however contributed to a modest net profit. That said, going forward, CI expects BM’s large share of both loans and deposits − as well as its leadership position in many business segments − will continue to generate good and sustainable earnings.
As BM’s LT FCR is at the sovereign level, the ESL of Moderate precludes any uplift from the BSR. In addition, given the strong correlation between the Bank and the sovereign’s ratings, any improvement or deterioration in Oman’s LT FCR and/or outlook will have a corresponding effect on BM’s ratings and outlook. The Moderate ESL is underpinned by the Bank’s sizeable government shareholding (direct and indirect) and its systemic importance as the largest bank in the country. BM remains the only bank in Oman to be designated as a Domestic Systemically Important Bank (D-SIB). CI is of the opinion that Oman’s strengthened fiscal capacity is expected to ensure that moderate levels of government support will continue to be available to the banking sector in case of need.
Rating Outlook
The Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months, and reflects our expectation that the Bank will maintain a broadly stable business and financial position.
Rating Dynamics: Upside Scenario
As the Bank’s LT FCR is already set at the same level as the sovereign, we do not expect a change in that rating or outlook unless the ratings of the sovereign itself were raised. This is currently seen as being unlikely within a 12 month timeframe.
Rating Dynamics: Downside Scenario
Similarly, the ratings and/or outlook could be revised downwards in the next 12 months if there was a similar rating action on the sovereign, although this is not our base scenario. CI anticipates a further – albeit gradual – recovery of the economy and the Bank’s sound financial position is expected to be maintained.
Contact
Primary Analyst: Agnes Seah, Senior Credit Analyst; E-mail: agnes.seah@ciratings.com
Secondary Analyst: Karti Inamdar, 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.
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