(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has raised Bank Muscat’s (BM) Long-Term Foreign Currency Rating (LT FCR) to ‘BB+’ from ‘BB’ and the Bank Standalone Rating (BSR) to ‘bb+’ from ‘bb’. The Outlook for the LT FCR and BSR has been revised to Stable from Positive. These changes follow CI Ratings’ one notch increase in the Operating Environment Risk Anchor (OPERA) to ‘bb’ from ‘bb-’ and also take into account the recent upgrade of Oman’s sovereign rating to ‘BB+’ from ‘BB’. The Bank’s Short-Term FCR (ST FCR) of ‘B’, Core Financial Strength (CFS) rating of ‘bbb’ and Extraordinary Support Level (ESL) of Moderate have been affirmed.
As BM’s BSR is at the same level as Oman’s LT FCR, this precludes any uplift for the Bank’s LT FCR despite the Moderate ESL. The Bank’s support level is underpinned by the sizeable direct and indirect government shareholding, its systemic importance, as well as the government’s strong track record of providing assistance to banks in need, coupled with its stronger fiscal position. As the Bank’s ratings are closely correlated to those of the sovereign, any improvement (or deterioration, although unlikely at the moment) in Oman’s LT FCR and/or Outlook will have a corresponding effect on the Bank’s ratings and Outlook.
The Bank’s BSR is derived from a CFS rating of ‘bbb’ and a revised OPERA of ‘bb’, which denotes moderate risk. The upward revision of the OPERA reflects the government’s prudent macroeconomic policies, and the reform implementation under the Oman Vision 2040 programme to create a friendly business environment to attract FDI and to encourage increased participation from the private sector. Risks emanating from the dependence on hydrocarbons however persist. The revision of the OPERA is also driven by the recent upgrade of Oman’s sovereign LT FCR to ‘BB+’ from ‘BB’, which reflects the continued decline in government debt and CI’s expectation that fiscal and external balances will remain in surplus in 2024-25, benefitting from favourable hydrocarbon prices and sustained reform momentum. The improving operating environment and strengthened investor confidence in Oman will provide better prospects for loan growth and a possible stabilisation of loan asset quality for the banking sector going forward. CI considers the banking sector’s good capital buffers as an important cushion against the moderate asset quality. Concentration risks in both assets and funding prevail in the banking system.
The CFS and BSR are underpinned by the Bank’s strong capital ratios, sound loan asset quality, and resilient profitability metrics. The latter improved further in 2023 on the back of strong growth in operating profit. Key financial metrics were maintained at a good level and remained among the best in the banking sector. BM’s flagship status and strong customer franchise alongside its significant share of both assets and deposits in the banking system further support the ratings. The main constraints on the ratings, in common with the banking system, are the moderately large customer concentrations in lending and funding. The latter relate mainly to government deposits which still form around a third of total banking system deposits.
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 a remote possibility, the Bank’s LT FCR could be raised by one notch or the Outlook revised to Positive provided a similar rating action is taken on the sovereign’s ratings. This could occur even in the absence of a change in the BSR because of the Moderate ESL.
Rating Dynamics: Downside Scenario
While not our base case, the LT FCR could be lowered by one notch or the Outlook revised to Negative provided a similar rating action is taken on the sovereign’s ratings, or if there is a significant deterioration in the Bank’s standalone financial strength.
Contact
Primary Analyst: Agnes Seah, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Karti Inamdar, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
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