(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 Oman Arab Bank (OAB) at ‘BB’ and ‘B’, respectively. At the same time, CI Ratings has affirmed OAB’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 indicates moderate risk and takes into account the improving macroeconomic environment due to higher oil prices.
The Bank’s BSR and CFS rating are underpinned by the deep pool of customer deposits which support its good loan-based liquidity position, the solid and improved capital ratios following the issue of perpetual bonds, and the still sound loan asset quality metrics. The rating also reflects the support available from the Bank’s major shareholder, Arab Bank Plc (Jordan), which continues to make available a sizeable line of credit as well as technical support. The well regulated environment and prudent policies of the Central Bank of Oman (CBO) also support OAB’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 key challenge for OAB is improving profitability metrics, and in particular reducing its high operating cost base. 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, recent increases in hydrocarbon prices could further improve Oman’s fiscal position.
OAB is the fifth largest bank in Oman in terms of total assets at end-2021. Its strategic acquisition of Alizz Islamic Bank (AIB) in July 2021 − which will continue to operate autonomously and is one of only two fully fledged Islamic banks in Oman − serves to diversify the Bank’s risk assets and revenue streams away from conventional banking. AIB is just over a quarter of the size of OAB and its return to net profit was a major positive development in 2021.
Reflecting its strong corporate franchise, the Bank’s loan book remained skewed towards this segment at end 2021. However the corporate exposure remained well diversified across a wide range of industries without any undue sector concentration. Borrower concentration arising from the small Omani market remains moderately high, in common with its peers. In terms of loan asset quality, some parameters have weakened in common with peers in 2021. NPLs (Stage 3 loans) rose but the NPL ratio remained fairly moderate and loss coverage was strengthened to 100% at end-2021. A fresh capital injection in 2021 has also improved the buffer.
The Bank’s fairly large book of special mention loans and the high proportion of forborne loans contributed to the still high level of Stage 2 loans. However this was in common with peers and remains an area of some concern. 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.
A consistent key strength of the Bank is its large base of customer deposits, which have continued to support its good liquidity profile. The net loans to customer deposits ratio was among the best in the peer group and wholesale borrowings continued to be very low. A rising level of CASA deposits has also provided the Bank with one of the lowest cost of funds in the peer group. The liquidity buffer remains good in line with the Bank’s internal policy to maintain its liquidity coverage ratio well above the regulatory requirement. A continuing vulnerability for OAB and its peers is the high concentration of government deposits that is partly mitigated by the historical ‘stickiness’ of these deposits. Moreover, the vulnerability to government withdrawal risk has also reduced with the improving fiscal position of the sovereign, in line with the rising oil price.
In terms of capital, the issue of perpetual bonds last year noticeably strengthened the Bank’s capital ratios, although they still lagged peer group averages. The quality of capital is good, with a high proportion of CET1/Tier 1 capital. The balance sheet leverage ratio also improved and was good at end-2021. Internal capital generation however remained weak due to lower earnings for the period which was impacted by a large impairment charge and the repayment of subordinated loans. A credit positive was the full retention of earnings for both 2020 and 2021, which also highlights OAB’s supportive shareholders.
Profitability parameters continued to weaken last year due to high provision charges and elevated operating costs resulting from the 2020 acquisition of AIB. OAB’s net profit more than halved in 2021 and ROAA declined further and was the lowest in the peer group. However, on a positive note, the Bank continued to grow its operating income. The sound expansion of fee-based income and higher gains from securities were the main drivers of operating income growth in 2021. Net interest income contracted modestly due to the narrowing of the net interest margin (NIM). While the Bank has one of the lowest cost of funds, its interest income on average asset ratio was thinner due to the finer yield from its larger corporate book compared to a number of its peers. Improving profitability metrics for OAB and the sector is likely to remain challenging due to pressure on NIM, the keen competition and the relatively small size of the Omani market. Furthermore, for OAB, this is likely to be constrained by high operating costs. All that said, the Bank’s reasonably good share of the banking system loans and deposits would continue to provide it with a sound and sustainable level of earnings.
As the Bank’s LT FCR is at the sovereign level, the ESL of Moderate does not result in 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 OAB’s ratings and outlook. 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.
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 reasonably sound financial metrics, as well as exhibit some improvement in earnings.
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 as well as a sustainable recovery of earnings.
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, although this is not our base scenario. CI anticipates a further – albeit gradual – recovery of the economy. However, a further weakening of profitability and/or loan asset quality could put pressure on the BSR.
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.
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 audited financial statements for FY2018-21 and Q1 22. 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 methodology used to determine the ratings is the Bank Rating Methodology, dated 3 April 2019 (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 1987. The ratings were last updated in March 2022. 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.
Conditions of Use and General Limitations
The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.
Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.
Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.
The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Copyright © Capital Intelligence Ratings Ltd 2022
MENAFN18052022002960000411ID1104236015
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.