Tuesday 11, April 2017 by Jessica Combes

Oman Arab Bank's FSR Lowered; outlook revised to Stable

In view of the weaker operating environment Capital Intelligence Ratings (CI Ratings or CI) has lowered Oman Arab Bank S.A.O.C.’s Financial Strength Rating to ‘BBB-’ from ‘BBB’.


Notwithstanding sound metrics, loan asset quality for the sector, including OAB, has weakened and further increases in non-performing loans (NPLs) are likely on account of slower economic growth and in particular delayed payments by the government. The latter led to the sharp rise of OAB’s special mention and past due not impaired loans in 2016. Liquidity ratios have also tightened reflecting the government’s fiscal constraints and its limited capacity to inject liquidity (which is also likely to be a continuing problem over the medium term). While OAB’s liquidity indicators remained better than peers, these ratios have been on a tightening trend over the past few years. The small size of the Omani market makes banks more vulnerable to adverse changes in economic conditions. Profitability indicators, as with OAB, have also declined as a result of higher funding costs and increased provision charges. Most of these negative factors were also witnessed in peer banks.


Nonetheless, OAB’s FSR remains underpinned by its still generally good financial metrics in terms of the solid and improved Basel III capital ratios, the sound loan asset quality indicators, together with the achievement of the more than full loan-loss reserve coverage, and the large customer deposit base which has contributed to its better than peer group average liquidity indicators. OAB’s rating is, however, constrained by the high and rising level of special mention and past due not impaired loans, as well as the potential future increase in NPLs, in view of the seasoning of the loan book, which had shown robust growth over the past few years. The fairly high customer concentration in both loans and customer deposits and the declining trend of both the operating and net profitability ratios are other constraining factors.


Although a ‘Negative’ outlook had been appended to OAB’s Foreign Currency Ratings (FCRs) during the last review in view of the weakening operating environment at that time, CI Ratings has affirmed the Long- and short-term ratings unchanged at ‘BBB’ and ‘A3’, respectively. The long-term FCR is set one notch above the FSR in view of the Bank’s ownership, management and the support of Arab Bank Jordan. The Support Rating, as in the previous year, is maintained at ‘two’, reflecting the high likelihood of support from the government, as well as from its strategic and relatively sound major shareholders in Jordan. Following the above rating actions, the outlook for all the ratings is revised to ‘Stable’ from ‘Negative’.


Notwithstanding its relatively small balance sheet size, OAB has a strong corporate banking franchise in Oman. The Bank continues to work closely with its strategic shareholder, Arab Bank PLC Jordan in the area of infrastructure and industrial projects in the country. Amid the slow economic growth, asset and loan growth at OAB moderated substantially in 2016. Loan asset quality, mirroring the trend of the sector, also weakened with substantial rises in special mentioned and past due not impaired loans. Management has, however, advised that a large proportion of these special mentioned loans were related to government owned entities. The achievement of the more than full loan-loss reserve coverage position in 2016, the first time in many years, and a rise in the effective coverage ratio are positive developments.


Aided by its strong corporate franchise, the Bank continues to have a large customer deposit base which in turn contributed to the Bank’s better than peer group liquidity indicators. Both the Bank’s net loans to stable funds ratio and the net liquid asset ratio remained the best among its peers at end 2016. Nonetheless, like many of its peers, OAB’s liquidity ratios have been on a tightening trend over the past few years, although the ratios remained at acceptable levels at end 2016 and continues to be supported by the standby line of credit (albeit slightly reduced) from its strategic shareholder, Arab Bank, Jordan. The Bank’s liquidity coverage ratio was also maintained well above regulatory requirement in 2016.


Customer concentration levels remained high in both its lending and deposit book, reflecting the relatively small size of the market and the fairly low savings rate in the country. Notwithstanding the improvement, concentration risk, in common with its peers, remains a constraint to the Bank’s ratings.


In 2016 OAB’s capital ratios improved noticeably, reaching the peer group and industry average, aided by a modest rights issue to existing shareholders, a moderate amount of perpetual bonds and the retention of earnings with only stock dividend declared in respect of FYE 2016. The Bank’s total capital to total assets ratio rose to an even stronger level and internal capital generation rate was slightly better than the peer group average as no cash dividend was declared for FYE 2016.


As with the sector, OAB’s earnings were negatively impacted by the contraction of non-interest income due largely to a cap on insurance cover fee introduced by the regulator. Net interest income growth, on the other hand, remained constrained by the narrowing of the net interest margin. The Bank’s high cost base also increased further in 2016 and its operating expenses to average assets ratio was the highest in the CI peer group. Together with a further increase in the provision charge, the Bank reported a fairly large contraction of the bottom line. The latter was boosted by the gain from the sale of its discontinued investment banking operations. Excluding this extraordinary gain, the Bank’s net profit would register a substantial year-on-year decline and the ROAA would have also fallen to under 1 per cent, the lowest in the peer group.


OAB was established in 1984 after it acquired the Omani branches of Arab Bank. Arab Bank subscribed to 49 per cent of OAB's share capital and Omani shareholders took 51 per cent. Arab Bank manages OAB and is closely involved in the running of the Bank. The Bank’s local shareholder is Ominvest, the country's oldest investment company, whose shares are widely held by Omani individuals and enterprises. At end 2016 the Bank had assets totalling $5.4 billion and an equity base of $736 million. It reported a net profit of $64 million in 2016 which represented a year-on-year decline of 15.5 per cent.


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