(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 National Bank of Oman (NBO) at ‘BB’ and ‘B’, respectively. At the same time, CI Ratings has affirmed NBO’s Bank Standalone Rating (BSR) of ‘bb’, Core Financial Strength (CFS) rating of ‘bbb-’ and Extraordinary Support Level (ESL) of Moderate. The Outlook for 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-’. The latter denotes moderate risk and takes into account the improving macroeconomic environment due to higher oil prices.
The BSR and CFS rating are driven by the strong growth of customer deposits, together with an improved customer deposit mix, solid capital ratios, sound loan asset quality metrics and improving profitability metrics. The rating also reflects the Bank’s established customer franchise and supportive shareholders. The well regulated environment and prudent policies of the Central Bank of Oman (CBO) also support NBO’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.
With the easing of lockdown measures and a recovery of the economy, NBO’s asset growth rebounded in 2021. Total assets grew further in Q1 22. The loan book remains fairly well diversified between corporate and retail, reflecting the Bank’s good customer franchises in both market segments. Its corporate exposure was well diversified by economic sector without undue concentration, however borrower concentration remained high in common with peers due largely to the dominance of a few large conglomerates and government related companies in a small market.
Notwithstanding the ending of forbearance measures, NBO’s loan asset quality metrics continued to be resilient. Its NPLs (Stage 3 loans) ratio remained at a moderate level and reasonably good loss coverage was also maintained. Furthermore, Stage 2 loans also fell although it still represented a moderately high proportion of gross loans at end-2021. The high level of Stage 2 loans was in common with peers and remains an area of some concern for the sector as a whole. Omani banks tend to have a much larger book of Stage 2 loans than other banks in the region due to the CBO’s stricter classification standards. In this regard, CI continues to draw some comfort from the Bank’s sound risk management and the well regulated banking sector. Furthermore the ending of lockdown measures, improving economic recovery due to rising oil prices and the positive business sentiment in the country augur well for the Bank’s future loan asset quality. There was an improvement in asset quality metrics in Q1 22. The solid capital base also provides some additional buffer along with its improving operating profitability and sound credit loss absorption capacity, which continue to be supported by good income generation from its established franchise.
A major positive development was the strong expansion of customer deposits in 2021 and Q1 22, alongside a good improvement in the customer deposit mix. Loan based liquidity ratios thus eased to more comfortable levels, although the loan to deposit ratio was overstretched as in the case of its peers. This is a common feature of Omani banks, reflecting the small market and relatively low savings rate in the country despite some recent improvement. A related vulnerability is the large proportion of government deposits in the financial system, partly mitigated by the historical ‘stickiness’ of these deposits. The risk of government deposit withdrawal has also reduced with the improving fiscal position of the sovereign due to rising oil prices. Other liquidity metrics such as the liquid asset and net broad liquid asset ratios remained satisfactory, as did the liquidity coverage ratio. Wholesale borrowings dropped in Q1 22 and refinancing risk is considered moderate.
Despite the recent declining trend, the Bank’s capital ratios were fairly solid at end Q1 22 although lagging peer group averages. The quality of capital was good with a high component of CET1/Tier 1 capital. Both balance sheet and Basel III leverage ratios inched down marginally but were still at good levels at end Q1 22. Internal capital generation turned positive with better earnings and a lower dividend payout ratio. Going forward, the latter is anticipated to improve with good lending prospects. Furthermore, the Bank is also planning to issue perpetual bonds to support growth over the short to medium term. This is likely to raise capital ratios to stronger levels at end-2022.
In terms of earnings, the Bank reported a strong rebound in 2021 and good growth in Q1 22. In both periods, this was to a larger extent supported by a sizeable increase in non-interest income and in particular fee based income (in 2021), and a higher net investment income (in Q1 22). Net interest income was flat in 2021 and registered a modest y-o-y decline in Q1 22 due to the narrowing of the net interest margin (NIM). Nonetheless, NIM was better than the peer group average in 2021. The sound cost efficiency ratio and lower impairment charges in both periods led to a rebound in net profit in 2021 and solid growth in Q1 22. Operating and net profitability ratios are thus on an improving trend and were slightly ahead of the ratios of some of NBO’s peers. Notwithstanding the good prospects to increase earnings, NIM is likely to remain under pressure due to the keen competition in the relatively small market of Oman. Lower impairment charges in line with an expectation of a stabilisation of loan asset quality could provide a boost to future earnings. Nonetheless, CI anticipates that the Bank’s good franchise and market share will continue to provide it with a sound and sustainable level of earnings.
As NBO’s LT FCR is at the sovereign level, the ESL of Moderate does not result in any uplift from the BSR. CI expects that given strengthened fiscal capacity, the moderate levels of government support will continue to be available to the banking sector in case of need. 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.
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
Although not considered likely in the next 12 months, the LT FCR Outlook could be revised to Positive and/or the ratings raised if there was a similar rating action on the sovereign. An upgrade of the BSR would require a good improvement in loan asset quality and a strengthening of capital ratios.
Rating Dynamics: Downside Scenario
The ratings and/or outlook could be revised downwards in the next 12 months if there was a similar rating action on the sovereign. A downgrade of the Bank’s BSR would require a significant weakening of financial metrics, which is not our base scenario. CI anticipates a further – albeit gradual – recovery of the economy, which would also help the Bank to maintain its sound financial position.
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
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