Alizz Islamic Bank – National Ratings Affirmed with a Stable Outlook


(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long- and Short-Term ratings on the Oman National Scale of Alizz Islamic Bank (AIB) at ‘omAAA’ and ‘omA1+’, respectively. The Outlook for the ratings is Stable.

The ratings are underpinned by the Bank’s sound financial
metrics in terms of financing asset quality, liquidity and improving profit
ability. The capital ratios are expected to strengthen noticeably with the planned issue of perpetual bonds. The ratings also reflect AIB’s solid Islamic franchise and status as a wholly owned subsidiary of Oman Arab Bank (OAB). At end-2023, AIB remains one of the only two fully fledged Islamic banks in the country with a significant share of the Islamic banking market
, and one of the largest Islamic banking branch networks.

The main challenge for AIB and the banking system is the still elevated credit risk environment as reflected by the high level of Stage 2 financings. Financing rates have risen over the last few years and this could put additional pressure on borrowers and result in migrations to Stage 3. That said, the improving operating environment, sound economic growth and continued recovery of businesses from the pandemic could stabilise the banking system’s (and AIB’s) asset quality. Another challenge in common with peers is the small size of the banking market
and the narrow economy of Oman, which remains highly dependent on hydrocarbons. This in turn contributes to the moderately high customer concentrations in both the financing book and the deposit base. The latter relates to the high proportion of government deposits in the banking system. AIB’s ratings are further constrained by its sizeable real estate exposure and moderately low, albeit improving, profit
ability metrics. CI also views with some concern the increased geopolitical risk in the region relating to possible spillovers from the war in Gaza and elevated tensions between the US and Iran, and its potential impact on Oman’s economy and the banking sector.

Notwithstanding a slowdown in financing activities, financing receivables (FRs) growth remained reasonably good in 2023. While AIB’s corporate book was fairly well spread across a wide range of industries, its personal financing portfolio mainly comprised housing financings. The latter together with financings to the construction and real estate sector constitute a high exposure to the real estate sector. This concentration risk however remains mitigated by the granularity of the financing book, the collateralised nature of these financings and the good quality of these exposures. Notwithstanding an increase in non-performing financing receivables (NPFRs), AIB’s key asset quality metrics remained sound and resilient at end-2023, and compared reasonably well with the peer group. While NPFR loss coverage was not full, it was maintained at a good level. A negative development is the rise in Stage 2 FRs which partly reflects the larger restructured portfolio. This moderately high proportion of Stage 2 FRs is a concern and, in this regard, CI continues to derive comfort from the Bank’s good risk management and the prudent and well-regulated banking system in Oman.

A key strength of AIB is its large customer deposit base. Customer deposit expansion picked up strongly in 2023 and the Bank’s customer deposit mix was also largely maintained. Financing-based liquidity metrics thus eased last year. While AIB’s financing to deposit ratio remained tight, it was better than the overstretched positions maintained by its immediate peers and other conventional banks. Its net financings to stable funds ratio was also at a comfortable level. The Bank’s liquid asset ratio is moderate and declining due to the limited availability of Islamic investment
securities, and has therefore been weaker than those of conventional banks. The Bank’s LCR and NSFR ratios strengthened in 2023 and were well ahead of regulatory requirements.

In common with peers, there are customer concentrations in the financing book and the depositor base. This is attributable to the small size of the Omani market
and the high proportion of government deposits in the financial
system. However, government deposits are relatively ‘sticky’ and, furthermore, government deposit withdrawal risk has reduced noticeably with the strengthening of the sovereign’s fiscal position in recent years on the back of favourable oil prices.

In terms of earnings
, operating income growth was constrained by the narrowing of the net financing margin which was impacted by the higher financing rate environment. Consequently, net financing income was flat in 2023. However, the pick-up in fee and commission income was a positive development. A reduction in other operating expenses supported the growth in operating profit
and lowered the cost-to-income ratio, although it remained high. Despite an increase in impairment charges, the Bank was able to post good growth in net profit
in 2023. Both operating and net profit
ability ratios thus improved but remained moderately low. The Bank’s financing loss provision expense to operating profit
ratio improved further and supported the sound risk absorption capacity. AIB’s strong franchise and good share of the Islamic banking market
should continue to provide the Bank with a sound and sustainable level of earnings
going forward.

The Bank’s capital base is replenished by the full retention of net profit
. However, with risk weighted assets rising faster than regulatory capital, there was a marginal fall in the Bank’s capital ratios in 2023. While staying ahead of regulatory requirements, they lagged the strong ratios of other Omani banks in 2023. The quality of capital is good given the high proportion of CET1 and Tier 1 components. Internal capital generation improved in recent years on the back of higher earnings
and profit
retention. Basel III and balancesheet
leverage ratios were maintained at good levels at end-2023. The planned issue of perpetual bonds this year is anticipated to strengthen AIB’s capital ratios to more solid levels and bring them on par with many of its peers. As AIB remains a wholly owned subsidiary of OAB, CI also expects that ordinary support from its financial
ly sound ultimate shareholders, Arab Bank and Oman International Development and Investment Company, to be forthcoming 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 AIB’s LT national rating has reached the highest level on CI’s Oman national rating scale, no further upgrade is possible.

Rating Dynamics: Downside Scenario

A revision of the rating Outlook to Negative would need to be preceded by a similar rating action on the sovereign, all other factors remaining unchanged. The Bank’s LT national rating could be lowered by one notch if there was a similar rating action on the sovereign.

A National Rating summarises the repayment risk of an entity relative to other entities within the same economy. It is not an absolute measurement of risk. National Ratings are not directly comparable across borders.

Contact

Primary Analyst: Agnes Seah, Senior Credit Analyst; E-mail: ...
Secondary Analyst and Committee Chairperson: Karti Inamdar, 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 FY2021-23. 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 methodologies used to determine the ratings are the Bank Rating Methodology, dated 3 April 2019 (see and the National Scale Ratings Criteria for Oman, dated 3 March 2021 (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 (annual) review of the rated entity. National ratings on the entity were first released in July 2015 and last updated in March 2024. 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.

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