(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has upgraded the Long- and Short-Term issuer ratings of National Finance Company SAOG (NFC or the Company) on the Oman National Scale to ‘omA’ and ‘omA1’, respectively, from ‘omA-’ and ‘omA2’. The Outlook on the ratings is Stable.

The upgrade of NFC’s ratings is underpinned by the Company’s improved business and financial risk profile. Financing asset quality has been steadily improving over recent years, and debt metrics are also at more comfortable levels, with the latter also aided by the issuance of perpetual bonds last year. A steadily improving funding and liquidity position in recent years, along with favourable trends in profitability, are also contributing factors.

The ratings are also driven by NFC’s franchise as the largest non-bank financing institution (NBFI) in Oman. Other factors supporting the ratings are the strength of its largest shareholder — the financially sound Ominvest — as well as NFC’s strong and experienced management team. While direct shareholder support has not been needed or demonstrated to date, ordinary support is expected to be available; Ominvest has a good record in this respect for ordinary support for other companies and banks in which it has major holdings. Further additional credit strengths include sound capitalisation and debt service capacity, good profitability, and a well-diversified lender base.

The main credit challenges are the relatively small Omani market, strong competition from banks for both SME and consumer lending, and the narrowness of NFC’s business model. The latter in part reflects the regulatory limits that still impact NBFIs on both sides of the balance sheet, notwithstanding some easing in recent years. Other challenges relate to still moderately weak financing asset quality metrics and a structural reliance on contractually short-term bank funding. Despite a diversified lender panel, there remains a degree of concentration in funding sources, although this is partly mitigated by NFC’s well-established relationships with lender banks; most lines have been in place for many years.

While NFC plans to continue to grow its retail book with a focus on salaried individuals, it also plans further growth in the corporate segment, especially focusing on existing customers which have demonstrated a sound credit history and cash flow metrics over a long period. The current lending policies are much more cautious about credit extension to new SME customers, and have a stated preference for smaller ticket lending to avoid concentrations. Lending prospects are buoyed by improved economic growth and the continued recovery of businesses from any lingering impacts of the Covid-19 pandemic.

NFC’s financing receivable (FR) book remains skewed towards the SME and corporate segment, although financings for individuals have shown robust growth in recent years. There remains some concentration towards the wider services sector. Non-consumer financings are largely collateralised. By facility type, the largest proportion of financings, as in previous years, consisted of lending for new and used vehicles.

The headline financing asset quality metrics have shown a gently improving trend, with moderate-to-low non-performing financing receivable (NPFR) accretion and stronger financing growth over the last 2.5 years. At the same time, the Company has strengthened its NPFR loss coverage over this period. The latter ratio, however, remains moderate; the level of provisioning required under IFRS 9 reflects a business model where almost all non-retail financing is extended on a secured basis. NFC’s financing asset quality metrics in terms of the NPFR ratio and loss coverage remained better than those of its NBFI peers. Less positively, however, Stage 2 FRs rose over the 2024–H1 25 period following a decline in 2023. These still represented a moderately high proportion of gross financings of 14.2% at end-H1 25, which is much higher than the two other CI-rated peers but slightly lower than the average for the banking sector in Oman. The transition from Stage 2 to Stage 3 financings has remained moderate over the last two years. Despite modest decline over the last two years, the book of restructured FRs remains sizeable and is a major reason for the higher Stage 2 level. The restructured accounts represent government-sponsored schemes for borrowers affected by the Covid-19 pandemic. However, the improving operating environment, continued recovery of businesses and easing policy rates should help to further improve financing asset quality metrics going forward.

NFC continues to enjoy a fairly comfortable funding position with long-standing relationships with Omani banks. Its lender panel further widened in recent periods with the inclusion of foreign banks (including a multilateral development institution more recently). However, some concentration remains, with the top four lenders providing over 60% of total borrowings at end-H1 25. There is also a high level of contractually short-term debt obligations, although a fairly large proportion of the latter relates to short-term facilities which have been renewed annually for a number of years. While the renewable short-term facilities have also kept headline debt metrics fairly tight, this is partly mitigated by the sizeable amount of unutilised but committed lines. The latter have also been further enhanced in Q3 25. Further, these undrawn lines, in addition to normal FR repayments, underpin NFC’s sound debt service capacity. Refinancing risk is considered moderate given good access to funding and the Company’s well-established relationships with its lenders. Corporate deposits have also continued to rise strongly in recent years following the relaxation of regulatory constraints, both in money terms and as a percentage of the asset base being funded. Looking ahead, they will, however, continue to form a modest proportion of the funding base given the remaining regulatory constraints.

NFC’s internal capital generation rate is sound (7.3% in 2024). Following the redemption of an earlier issue of perpetual bonds in 2023, the Company reinforced capital last year with a larger OMR35mn issuance of perpetual bonds. Consequently, leverage and debt to equity ratios improved in 2024 to more comfortable levels, although they slightly slipped in H1 25. Capital quality is sound, comprising share capital, retained earnings and perpetual bonds. Capital flexibility is also considered sound given the ability to replenish by issuing further perpetual bonds and/or subordinated debt and the probable availability of ordinary support from shareholders.

Both operating and net profit improved in 2024 and later in H1 25 on the back of continued faster financing growth as well as a further widened net financing differential. Despite this, ROAA mildly reduced from 2023 levels due to increased impairment charges but remained the best in the sector. The proportion of operating profit consumed by risk provisioning has trended up in the last 18 months, which is likely to continue in light of the growing FR book and also rising Stage 2 financings. The easing interest rate environment and Oman’s improved economic prospects should remain supportive of the Company’s continued lending growth and, in turn, earnings potential. Additionally, going forward, likely policy rate cuts should bode well for the net financing margin given that its largely fixed-rate existing lending is funded by floating rate borrowings.

Rating Outlook

The Stable Outlook indicates that NFC’s ratings are unlikely to change over the next 12 months, unless there is further significant improvement in financing asset quality metrics.

Rating Dynamics: Upside Scenario

An upward revision in the ratings would probably require a significant improvement in asset quality metrics. An upgrade in the sovereign rating, coupled with an upward revision in the OPERA/industry assessment, could also put some upward pressure on the ratings.

Rating Dynamics: Downside Scenario

NFC’s ratings could be either placed on a Negative Outlook or lowered by one notch if Oman’s sovereign ratings were to be lowered. In the absence of such a sovereign action, the Company’s ratings or outlook could still be lowered should asset quality significantly weaken in terms of a sharp rise of the NPFR ratio and/or the level of Stage 2 FRs.

Contact

Primary Analyst: Farah Parveen Khan, Senior Credit Analyst; E-mail: ...
Secondary Analyst & Committee Chairperson: Rory Keelan, 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 FY2021-24 and H1 25. 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.

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