CI affirms Ahli Bank (Oman)â€™s ratings with a stable outlook
Capital Intelligence Ratings (CI) has affirmed Ahli Bank’s (AB) Financial Strength Rating (FSR) at ‘BBB’, with a stable outlook.
The rating is supported by the technical and management services agreement (TMSA) with strategic shareholder Ahli United Bank (AUB: ‘A-’/‘A2’/’Stable’), the very sound loan asset quality, as well as the recent AT 1 capital increase, and more than satisfactory profitability at all levels. Constraining the FSR is the Bank’s standalone tight liquidity position, although this is mitigated by ample committed lines of credit.
The other rating constraints are ongoing customer deposit concentrations, low non-interest income (NII) coupled with margin compression. The challenging operating environment due to the significant fall in oil price is also a rating constraint. In view of the level of management control and ownership by AUB, CI Ratings has affirmed the Bank’s Long- and Short-Term Foreign Currency Ratings at ‘BBB+’ and ‘A2’, respectively, with a ‘Stable’ Outlook. AB remains integral to AUB’s regional business franchise. The Support Rating is affirmed at ‘3’, underscoring the high likelihood of support from the Omani authorities and from AUB in case of need.
AB is a well managed institution following a prudent credit policy and executing a clear business strategy. Risk management benefits from the expertise provided by AUB, the largest shareholder, under the five-year renewable TMSA. Key senior staff members are seconded from AUB. Although the Bank remains among the smaller institutions in the Omani banking system, it continues to expand successfully and diversify its business franchise, while gaining larger shares of the loan and customer deposit markets.
Having successfully diversified away from housing loans, the credit portfolio is now well balanced between corporate and personal lending, in line with the Bank’s strategic objectives. AB’s loan asset quality remains very sound as demonstrated by an exceptionally low non-performing loan (NPL) to gross loans ratio and more than full loan-loss reserve coverage. Effective remedial measures have historically limited the migration of ‘past due not impaired loans’ under 90 days to the NPL category. That said, credit risk in the Omani economy remains high due to ongoing depressed oil prices and this may translate into a higher NPL accretion rate in the near term.
Although AB’s balance sheet liquidity remains tight reflecting the comparatively large share of loans in total assets, this is significantly mitigated by the unutilised committed lines of credit at its disposal including from AUB. In practise, the Bank’s liquidity depends on these committed lines of credit, which remain significant. It is worth mentioning that to date AB has not utilised or withdrawn under its committed line facilities from various banks including AUB. An additional liquidity risk mitigating factor is the Bank’s very sound liquidity coverage ratio, as well as a sizeable government securities portfolio that it can pledge, if necessary, to raise funding on a secured basis. Nonetheless, AB’s liquidity as measured by the net liquid asset and net loans to stable funds ratios remains noticeably weaker than that seen at other Omani banks.
Following the brisk expansion seen in lending and customer deposits over the recent past, AB curtailed both during 2016 in the face of increased credit risk due to the sharp fall in oil prices. The contraction in customer deposits was driven by a policy to retire expensive time deposits amid a rise in the cost of funding seen in the sector. Although time deposits still constitute a major share of AB’s customer deposit funding, the contribution of demand and Islamic deposits continues to grow, especially as seen in H1 2017.
Over the long term, this is expected to improve customer deposit concentrations—as well as cost of funds—which remain high, in common with other Omani banks. AB’s largest deposits belong to mostly government related entities as is the case with peer banks. However, in the current environment of depressed oil prices and keen market competition for deposits, liquidity risk is rather pronounced as these large depositors search for yield. Nonetheless, although some of these entities have made withdrawals in recent periods, they can largely be relied upon to provide customer deposits depending on price.
The recent AT1 capital injection on 11 October 2017 has significantly strengthened the Bank’s capital adequacy ratio, which is currently on a par with the sector average. While risk buffers have improved, the capital proceeds are earmarked to fund ongoing business expansion in Oman. The CET 1 ratio remains at a very sound level. AB’s consistently good rate of internal capital generation, along with a moderate dividend policy, has served to replenish capital over the years.
AB’s profitability at both the operating and net levels remains sound, despite further falls. The ROAA remains among the best seen in the sector. This highlights partly strong gross income generation capability, notwithstanding the decline as a result of net interest margin (NIM) pressure and lower NII. In part due to the effect of regulatory limits on retail lending, as well as AB’s limited branch network, NII remains below that of its peers. In this regard, management is focused on rebuilding fee income through developing ancillary business with corporate customers. However, it should be mentioned that AB’s sound profitability metrics have come at the cost of standalone liquidity. Given improving liquidity conditions in the local market, profitability is expected to gradually improve in the near term aided by resumption of lending in H1 2017. As growth in low cost deposits also gathers pace, this should also help improve NIM.