Tuesday 01, August 2017 by Georgina Enzer

Moody's takes rating action on six Omani banks and one finance company

Moody's Investors Service ("Moody's") has downgraded the long-term local and foreign currency deposit ratings of the six banks it rates in Oman: BankMuscat S.A.O.G. (to Baa2 from Baa1), HSBC Bank Oman SAOG (to Baa2 from Baa1), Bank Dhofar SAOG (to Baa3 from Baa2), National Bank of Oman Limited (SAOG) (to Baa3 from Baa2), Oman Arab Bank (SAOC) (to Baa3 from Baa2) and Bank Nizwa SAOG (to Ba1 from Baa3).

In addition, the rating agency has changed the outlook to negative from stable on the ratings of five banks and maintained the negative outlook on the ratings of one bank. At the same time, Moody's has affirmed the baseline credit assessments (BCAs) and adjusted BCAs of the six banks.

Moody's has also today affirmed the Ba3 corporate family rating and the B1 issuer rating of Al Omaniya Financial Services SAOG (Al Omaniya), and maintained its outlook negative.

This action follows Moody's downgrade of the Government of Oman's issuer rating to Baa2 from Baa1 and the change of its outlook to negative from stable on 28 July 2017. The sovereign action reflects Moody's view that progress towards addressing structural vulnerabilities to a weak oil price environment has been more limited than expected, reflecting institutional capacity constraints to address the country's large fiscal and external imbalances. RATINGS RATIONALE

BANKS' DEPOSIT RATINGS DOWNGRADES REFLECT REDUCED OMAN GOVERNMENT SUPPORT CAPACITY

The driver underpinning today's downgrade of six Omani banks' deposit ratings is the weakening fiscal capacity of the Government of Oman to provide support to banks, as signalled by the downgrade of its issuer rating to Baa2/negative from Baa1/stable.

The key driver for the Government of Oman's rating downgrade is that in Moody's view progress towards addressing structural vulnerabilities has been more limited than expected, reflecting institutional capacity constraints to address the large fiscal and external imbalances. Fiscal performance in 2016 and during the first months of 2017 has been weaker than the government's reform announcements and oil price developments would have suggested.

 

Therefore, while the government has started to implement fiscal consolidation measures, Moody's believes the challenges are significant and that the plan is unlikely to address structural issues -- the high dependence of Oman's government finances on oil revenues and government spending dominated by current spending. The oil price shock has also led to a sharp deterioration in Oman's external current account. Following years of surpluses, the current account balance turned into a sizable deficit of 15.5 per cent of GDP in 2015 and widened further to 17.9 per cent in 2016.

Moody's projects current account deficits of 12 per cent of GDP on average in 2017-18, as oil export revenues recover only slowly. For more information on the Sovereign action, please see "Moody's downgrades Oman to Baa2, outlook negative".

-- NEGATIVE OUTLOOK ALIGNED WITH NEGATIVE OULOOK ON THE SOVEREIGN RATING

Moody's decision to assign a negative outlook to the Omani banks' long-term deposit ratings reflects the potential further weakening in the Omani government's support capacity, as reflected by the negative outlook on the government's issuer rating, and the potential that Moody's could reassess its assumptions regarding the government's willingness to support the country's banks. In addition, the negative outlook also reflects the possibility that a weakening operating environment could put downward pressure on the banks' standalone creditworthiness. This could result from lower than expected economic growth, or weaker than expected credit and funding conditions, which would pressure banks' solvency and liquidity profiles. Real GDP growth, which Moody's expects to slow to 0.3 per cent in 2017 in line with OPEC production cuts, was already down to 2.3 per cent in 2016 from 4.2 per cent in 2015, owing to lower hydrocarbon production growth combined with government spending cuts.

The negative outlook on Al Omaniya's ratings continues to reflect the potential negative impact from tighter liquidity conditions and softer economic growth on the company's liquidity and solvency profile.

-- BANKS' BASELINE CREDIT ASSESSMENT (BCA) AFFIRMATION

Moody's decision to affirm the BCAs of the six banks reflects the resilience in their financial performance, underpinned by continued solid asset quality, healthy capital buffers and relatively low market funding reliance.

Despite the possible challenges resulting from a weaker operating environment, we expect the creditworthiness of Omani bans to remain resilient. The banks exhibit a solid solvency profile, with system level problem loans to gross loans ratio of 2.1 per cent as of March 2017 and system level tangible common equity to RWAs ratio of 13.2 per cent. In addition, system level market funds to tangible banking assets ratio was modest at 10 per cent, and liquid resources were sound at 22.1 per cent of tangible banking assets.

-- BANK-BY-BANK SUMMARY OF ACTIONS

 

- BankMuscat S.A.O.G. (BankMuscat)

Moody's downgraded BankMuscat's long-term deposit rating to Baa2 from Baa1, and affirmed its BCA and adjusted BCA at baa2. At the same time, the rating agency changed the outlook on the bank's long-term deposit ratings to negative from stable.

The downgrade of the long-term deposit ratings reflects the Omani government's weakened capacity to provide support as detailed above.

Following the downgrade, the bank's BCA is now at the same level as the sovereign rating. As a result there is no longer any support uplift for the bank's deposit rating. The negative outlook on BankMuscat's long-term deposit ratings reflects the potential future reduction in Omani government creditworthiness, as indicated by the negative outlook on the sovereign rating, as well as the weakening domestic operating environment, which could lead to a weakening of the bank's standalone financial fundamentals. This could result from lower than expected economic growth, as well as weaker than expected credit and/or funding conditions.

The affirmation of the bank's baa2 BCA, despite the vulnerability of the country's finances and external accounts to oil price swings, reflects the bank's solid asset quality, sound capital (15.2 per cent tangible common equity to RWAs ratio at March 2017) and modest market funding reliance as well as its healthy profitability underpinned by a dominant domestic franchise (over 35 per cent domestic assets market share). However, declining liquid resources reduce the bank's buffers in a tighter funding environment.

- HSBC Bank Oman SAOG (HBON)

Moody's downgraded HBON's long-term deposit rating to Baa2 from Baa1, and affirmed its BCA at ba1 and its adjusted BCA at baa2. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The downgrade of the long-term deposit ratings reflects the Omani government's weakened capacity to provide support as detailed above.

Following the sovereign downgrade, the sovereign rating is now at the same level as the bank's adjusted BCA. As a result there is no longer any support uplift for the bank's deposit rating. The negative outlook on HBON's long-term deposit ratings reflects the potential future reduction in Omani government creditworthiness, reflected in the negative outlook on the sovereign rating, as well as the potential weakening in the domestic operating environment, which could lead to a weakening of the bank's standalone financial fundamentals. This could result from lower than expected economic growth, as well as weaker than expected credit and/or funding conditions.

The affirmation of the baa2 adjusted BCA reflects Moody's continued assumption of a 'high' probability of parental support for HBON from its ultimate parent HSBC Holdings Plc (A1 long-term senior unsecured debt rating, outlook negative) in case of need. This assessment translates in a two-notch uplift from the bank's ba1 BCA, reflecting HBON's strategic fit within the HSBC group, which has management control and brand name association with the group.

The affirmation of the ba1 BCA, despite the vulnerability of the country's finances and external accounts to oil price swings, reflects the bank's solid asset quality, sound loss absorption buffers and strong solid liquidity buffers (43.7 per cent liquid banking assets to tangible banking assets ratio at March 2017). These strengths are moderated by high asset concentrations and relatively low profitability.

- Bank Dhofar SAOG (Bank Dhofar)

Moody's downgraded Bank Dhofar's long-term deposit rating to Baa3 from Baa2, and affirmed its BCA and adjusted BCA at ba1. At the same time, the rating agency has maintained the outlook on the bank's long-term deposit ratings at negative.

The downgrade of the long-term deposit ratings reflects the Omani government's weakened capacity to provide support as detailed above.

The negative outlook on Bank Dhofar's long-term deposit ratings reflects the potential reduction in Omani government support capacity and/or support willingness, reflected in the negative outlook on the sovereign rating, as well as the potential weakening in the domestic operating environment, which could lead to a weakening of the bank's standalone financial fundamentals. This could result from lower than expected economic growth, as well as weaker than expected credit and/or funding conditions.

In addition, the negative outlook on Bank Dhofar's ratings continues to reflect potential pressures from modest capitalisation and rapid credit growth over recent years. The bank reported a 10.2 per cent tangible common equity to RWAs ratio at end-2016 which is lower than the 13.2 per cent system average. The bank's rapid loan growth over the recent years (21 per cent growth in 2015 vs 12 per cent system average) limits the seasoning of the book and poses challenges for the operational and underwriting controls. However, the bank's growth has slowed down to 10 per cent in 2016 (in line with the local average).

The affirmation of the ba1 BCA, despite the vulnerability of the country's finances and external accounts to oil price swings, reflects the bank's solid profit generation, modest market funding reliance (6.4 per cent market funds to tangible banking assets ratio at March 2017) and sound liquidity buffers reflecting access to large government related deposits.

However, the bank's construction sector exposure, rapid loan growth over recent years and modest capitalisation (9.8 per cent tangible common equity to RWAs ratio at March 2017) moderate these strengths.

- National Bank of Oman Limited (SAOG) (NBO)

Moody's downgraded NBO's long-term deposit ratings to Baa3 from Baa2, and affirmed its BCA and adjusted BCA at ba1. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The downgrade of the long-term deposit ratings reflects the Omani government's weakened capacity to provide support as detailed above.

The negative outlook on NBO's long-term deposit rating reflects the potential reduction in Oman government support capacity and/or support willingness, reflected in the negative outlook on the sovereign rating, as well as the potential weakening in the domestic operating environment, which could lead to a weakening of the bank's standalone financial fundamentals. This could result from lower than expected economic growth, as well as weaker than expected credit and/or funding conditions.

The affirmation of the ba1 BCA, despite the vulnerability of the country's finances and external accounts to oil price swings, reflects the bank's solid asset quality, sound capital buffers (12.9 per cent tangible common equity to RWAs ratio at end-2016 and 135 per cent loan loss reserves to problem loans as of March 2017) and healthy profitability underpinned by a well-established domestic franchise and operations in the United Arab Emirates (UAE). However, the bank exhibits modest liquid resources.

- Oman Arab Bank (SAOC) (OAB)

Moody's downgraded OAB's long-term deposit ratings to Baa3 from Baa2, and affirmed its BCA and adjusted BCA at ba1. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The downgrade of the long-term deposit ratings reflects the Omani government's weakened capacity to provide support as detailed above.

The negative outlook on OAB's long-term deposit rating reflects the potential reduction in Omani government support capacity and/or support willingness, reflected in the negative outlook on the sovereign rating, as well as the potential weakening in the domestic operating environment, which could lead to a weakening of the bank's standalone financial fundamentals. This could result from lower than expected economic growth, as well as weaker than expected credit and/or funding conditions.

The affirmation of the ba1 BCA, despite the vulnerability of the country's finances and external accounts to oil price swings, reflects the bank's sound asset quality which benefits from its conservative approach and close association with Arab Bank, its sound capitalisation (12.6 per cent tangible common equity to RWAs as of March 2017), as well as its low market funding reliance and adequate liquid resources. However, the BCA also captures the challenged profit generation.

- Bank Nizwa SAOG (Bank Nizwa)

Moody's downgraded Bank Nizwa's long-term deposit rating to Ba1 from Baa3, and affirmed its BCA and adjusted BCA at b1. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

 

The downgrade of the long-term deposit ratings reflects the Omani government's weakened capacity to provide support as detailed above.

The negative outlook on Bank Nizwa's long-term deposit rating reflects the potential reduction in Omani government support capacity and/or support willingness, reflected in the negative outlook on the sovereign rating, as well as the potential weakening in the domestic operating environment, which could lead to a weakening of the bank's standalone financial fundamentals. This could result from lower than expected economic growth, as well as weaker than expected credit and/or funding conditions.

The affirmation of the b1 BCA, despite the vulnerability of the country's finances and external accounts to oil price swings, reflects the bank's high capital buffers (20.8 per cent tangible common equity to RWAs ratio), moderated by rapid growth in recent years, low profitability reflecting a developing franchise, concentrated funding profile, limited liquid resources and its evolving risk management framework.

-- AFFIRMATION OF AL OMANIYA'S RATINGS; OUTLOOK REMAINS NEGATIVE

The affirmation of Al Omaniya's B1 issuer rating reflects its solid franchise in asset and working capital loans to corporates that supports its profitability, combined with a strong asset quality and high capitalisation (21.2 per cent tangible common equity standing to tangible managed assets ratio as of March 2017). However, the company's relatively weak funding and liquidity moderate these strengths.

The affirmation of the firm's Ba3 CFR reflects an unchanged one-notch uplift based on Moody's assessment of a high probability of affiliate support from BankMuscat in case of need, reflecting the longstanding strong financial and operational ties between the two companies, with BankMuscat being Al Omaniya's primary lender.

The company's negative outlook continues to reflect the potential impact from tighter liquidity conditions and softer economic growth on the company's credit profile, given the firm's reliance on secured confidence sensitive wholesale funding.

WHAT COULD CHANGE THE RATINGS -- UP

Upwards pressure on the banks' ratings is limited given the negative outlook on their ratings. A stabilisation in the Omani government's issuer rating outlook could lead to a stabilisation in the banks' rating outlooks.

In addition, for Bank Dhofar, continued resilience of asset quality metrics as the loan book seasons combined with a material improvement in capitalisation buffers could lead to a stabilisation of the ratings.

In addition for Al Omaniya, continued resilience of the liquidity and funding metrics amidst the current tightening environment could also lead to a stabilisation of the ratings.

WHAT COULD CHANGE THE RATINGS -- DOWN

 

Downward pressure on Omani banks' ratings could develop through: (1) a further weakening of the Omani government's capacity to provide support, as a downgrade of Omani government's issuer rating would imply, and/or (2) Moody's reassessment of the willingness of the government to provide support, which could result from a downgrade of the Omani government's issuer rating, and/or (3) a weakening of the domestic operating environment, as a lower Macro Profile would imply.

Downward pressure on Al Omaniya's ratings could develop through a combination of: (1) a significant deterioration in the firm's funding and liquidity metrics and/or (2) a material weakening in the company's solvency metrics.

LIST OF AFFECTED RATINGS

Issuer: Bank Dhofar SAOG

Downgrades:

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Remains Negative

....ST Bank Deposits (Local & Foreign Currency), Downgraded to P-3 from P-2

....Senior Unsecured MTN programme, Downgraded to (P)Baa3 from (P)Baa2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Affirmations:

....Adjusted Baseline Credit Assessment, Affirmed ba1

....Baseline Credit Assessment, Affirmed ba1....ST Counterparty Risk Assessment, Affirmed P-2(cr)

 

Outlook Actions:

....Outlook, Remains Negative

Issuer: Bank Nizwa SAOG

Downgrades:

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Ba1 from Baa3, Outlook Changed To Negative From Stable

....ST Bank Deposits (Local & Foreign Currency), Downgraded to NP from P-3

....LT Counterparty Risk Assessment, Downgraded to Baa3(cr) from Baa2(cr)

....ST Counterparty Risk Assessment, Downgraded to P-3(cr) from P-2(cr)

Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed b1

.... Baseline Credit Assessment, Affirmed b1

Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: BankMuscat S.A.O.G.

Downgrades:

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa2 from

Baa1, Outlook Changed To Negative From Stable

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from

Baa1, Outlook Changed To Negative From Stable

....Senior Unsecured MTN programme, Downgraded to (P)Baa2 from (P)Baa1

....Subordinate MTN programme, Downgraded to (P)Baa3 from (P)Baa2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Affirmations:

....ST Bank Deposits (Local & Foreign Currency), Affirmed P-2

....Adjusted Baseline Credit Assessment, Affirmed baa2

....Baseline Credit Assessment, Affirmed baa2

....ST Counterparty Risk Assessment, Affirmed P-2(cr)

Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: HSBC Bank Oman SAOG

Downgrades:

 

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa2 from Baa1, Outlook Changed To Negative From Stable

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Affirmations:

....ST Bank Deposits (Local & Foreign Currency), Affirmed P-2

....Adjusted Baseline Credit Assessment, Affirmed baa2

....Baseline Credit Assessment, Affirmed ba1

....ST Counterparty Risk Assessment, Affirmed P-2(cr)

Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: National Bank of Oman Limited (SAOG)

Downgrades:

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Stable

....ST Bank Deposits (Local & Foreign Currency), Downgraded to P-3 from P-2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Stable

....Senior Unsecured MTN programme, Downgraded to (P)Baa3 from (P)Baa2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Affirmations:

....Adjusted Baseline Credit Assessment, Affirmed ba1

....Baseline Credit Assessment, Affirmed ba1

....ST Counterparty Risk Assessment, Affirmed P-2(cr)

Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: Oman Arab Bank (SAOC)

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Stable

....ST Bank Deposits Rating (Local & Foreign Currency), Downgraded to P-3 from P-2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Affirmations:

....Adjusted Baseline Credit Assessment, Affirmed ba1

....Baseline Credit Assessment, Affirmed ba1

....ST Counterparty Risk Assessment, Affirmed P-2(cr)

Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: Al Omaniya Financial Services SAOG

Affirmations:

....LT Issuer Rating (Local & Foreign Currency), Affirmed B1, Outlook Remains Negative

....LT Corporate Family Rating, Affirmed Ba3, Outlook Remains Negative

Outlook Actions:

....Outlook, Remains Negative

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