(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has revised the Outlook for the Long-Term Foreign Currency Rating (LT FCR) of Oman Arab Bank (OAB) to Positive from Stable. The change follows CI Ratings’ recent revision of Oman’s sovereign rating Outlook to Positive from Stable. At the same time, CI has affirmed OAB’s the LT FCR and Bank Standalone Rating (BSR) of ‘BB+’ and ‘bb+’ (latter on Stable Outlook), respectively. The Bank’s Short-Term Foreign Currency Rating (ST FCR) of ‘B’, Core financial Strength (CFS) rating of ‘bbb-’, and Extraordinary Support Level (ESL) of Moderate have also been affirmed.
The Positive Outlook for the LT FCR reflects the moderate likelihood of OAB receiving extraordinary support from the government in the event of need. In accordance with CI’s criteria, the moderate ESL would result in the Bank’s LT FCR being raised one notch above its BSR provided the sovereign is upgraded in the next 12 months, as currently expected. Presently, the Bank’s LT FCR does not benefit from any uplift since the BSR is already at the sovereign level.
Our support assessment takes into account the Bank’s well established franchise with a sound share of the banking system’s loans and deposits, as well as the government’s track record of providing assistance to banks in the event of need. The ESL could be revised to High, provided Oman’s fiscal capacity continues to improve, which would allow for a two-notch uplift from the BSR. However, this would not affect the Bank’s LT FCR which cannot rise above the sovereign rating.
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 reflects robust non-hydrocarbon economic performance and high GDP per capita, as well as improving external strength. OPERA also takes into account the government’s commitment to reform implementation under Oman Vision 2040. The affirmation of the BSR and CFS rating takes into account the Bank’s sound and resilient financial metrics at end-H1 24, and the continued support of its major shareholder, Arab Bank Plc (Jordan).
Going forward, notwithstanding the still sizeable proportion of Stage 2 loans in the banking system and additional pressure on borrowers’ debt serviceability due to high interest rates, sound economic growth and the continued recovery of businesses post pandemic could help to further stabilise loan asset quality for OAB and the banking system, as well as provide good lending opportunities. A remaining challenge, in common with peers (and captured in OPERA), is the small size of the banking market and Oman’s narrow economy which remains highly dependent on hydrocarbons. This in turn has the effect of moderately elevating customer concentrations in both the loan book and the deposit base. The latter reflects the high proportion of government deposits placed in the banking system which remains an important source of funding.
Rating Dynamics: Upside/Downside Scenarios
An upgrade of more than one notch of the LT FCR over the next 12 months appears remote at this stage since this would require a two-notch upgrade in the sovereign’s rating from its current level.
On the downside, the outlook on the LT FCR could be revised back to Stable should a similar action be taken on the sovereign’s ratings, the Bank’s financials deteriorate or there is a change in our assessment of support.
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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