Revises Outlooks to Negative
Fitch Ratings-London-15 June 2016: Fitch Ratings has affirmed Bank Muscat's (BM) Long-Term Issuer Default Rating (IDR) at 'BBB+' and National Bank of Oman's (NBO), Bank Dhofar's, Bank Sohar's and Ahli Bank SAOG's (ABO) Long-Term IDRs at 'BBB'. The Outlooks on all the banks' Long-Term IDRs have been revised to Negative from Stable following a review of Fitch's assessment of Oman's ability to support domestic banks.
HSBC Bank Oman's (HBON) Long-Term IDR has been downgraded to 'A' from 'A+'. The Outlook is Negative. HBON's Long-Term IDR is driven by support from its ultimate parent, HSBC Holdings PLC (HSBC; AA-/Stable). We do not see any change in support from HSBC Holdings; the downgrade reflects our view that Omani transfer and convertibility risk has increased and caps support at 'A'.
At the same time Fitch has downgraded Bank Sohar's Viability Rating (VR) to 'bb' from 'bb+'. The main driver of the downgrade is the bank's weakening funding profile, but also takes into account uncertainty generated by late-stage merger discussions with Bank Dhofar, which affects the bank's ability to formulate and execute a medium-term strategy.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT
BM's, NBO's, Bank Dhofar's, Bank Sohar's and ABO's IDRs, Support Ratings (SRs) and Support Rating Floors (SRFs) reflect Fitch's expectation of a high probability of support from the Omani authorities in case of need, based on the sovereign's strong ability and willingness to do so. Fitch makes a distinction between BM's SRF and that of the other banks in Oman, because of BM's dominant role in the sector, and therefore its greater systemic importance. Senior debt ratings are driven by the same factors as those that drive the IDRs.
The affirmation of the banks' 'F2' Short-Term IDRs, the higher of the two Short-Term IDRs that map to a 'BBB' Long-Term IDR on our rating scale, reflects our view that the sovereign's propensity and ability to support is more certain in the near term.
HBON's IDRs and SR are driven by Fitch's expectation of an extremely high probability of support available to the bank from HSBC. Fitch considers HBON to be a strategically important subsidiary of HSBC, given its importance to the group's regional strategy and franchise. Fitch does not consider it to be a core subsidiary, as HSBC does not have full ownership of the bank (although it has board and management control) and because of HBON's small size relative to other core HSBC subsidiaries globally. HBON's Long-term IDR would, if uncapped, be notched down once from HSBC's Long-term IDR.
The Negative Outlook on BM's, NBO's, Bank Dhofar's, Bank Sohar's and ABO's IDRs reflects the likelihood of further weakening of our view of the Omani authorities' ability to support domestic banks. The Negative Outlook on HBON's IDR reflects the likelihood of a further increase in transfer and convertibility risks that would affect HSBC's ability to provide support to its Omani subsidiary.
VRS
BM's VR is underpinned by the bank's dominant franchise in Oman, which supports its ability to generate healthy operating profits, and within the context of the operating environment, its resilient asset quality, despite some lending concentration, and sound capitalisation. We also take into account BM's substantial depositor base with a strong retail component; deposits are well diversified compared with domestic and regional peers. Liquidity is sound and is a focus for the bank.
NBO's VR reflects a relatively limited franchise, but also a fairly prudent risk appetite, which has translated into sound asset quality and less loan concentration compared with peers. We expect some weakening in capitalisation in the longer term, although the bank's growth targets are measured and capital should remain at the current sound level in 2016/17 . The VR also factors in the bank's track record of solid profitability and its adequate liquidity and relatively diversified funding.
HBON's VR is supported by the bank's company profile, which benefits from being part of the HSBC group for product offering and geographical reach. Sound capitalisation and liquidity ratios are also factored into the rating, particularly as Fitch expects ample liquidity and capital would be available from the group in case of need. HBON's balance sheet is more liquid than that of peers and this is one reason for the bank's weak profitability, which remains well below that of peers. Impaired loans remain fairly high compared with domestic peers, but these are well covered by reserves and the addition of new impaired loans is limited. The bank's current more conservative underwriting standards should support sound asset quality in the future.
Bank Dhofar's VR reflects improved capitalisation following capital-raising in 2Q15, albeit still moderate in light of lending concentrations, and a deposit-funded loan book but with deposit concentrations that are high compared with peers. The VR also reflects a fairly low risk appetite, which is reflected in healthy asset quality metrics, but takes into account high loan concentrations, relative to peers.
ABO's VR benefits from the bank being part of Ahli United Bank group and its wider regional network, and the bank's track record of maintaining sound asset quality. It also factors in the bank's just adequate capitalisation, in light of above average lending concentrations, and a comparatively small franchise in Oman. ABO's funding is highly concentrated, and the bank is more reliant on wholesale markets to fund its loan book than its peers. Liquidity is tightening and we view it as a weakness for the VR.
Sohar's VR takes into account the bank's weaker liquidity profile. Coverage of liquid assets to short-term liabilities has reduced since end-2014. The late-stage merger discussions with Bank Dhofar, which we understand should be resolved in the near future, are also putting pressures on formulating and executing a coherent strategy. The VR also factors in Bank Sohar's reasonably sound asset quality but concentrated lending, making the bank's capital sensitive to one of its larger exposures becoming impaired, in Fitch's view.
RATING SENSITIVITIES
IDRS, SENIOR DEBT, SRS, SRFS
BM's, NBO's, Bank Dhofar's, Bank Sohar's and ABO's IDRs, SRs and SRFs are sensitive to a change in Fitch's assumptions around the Omani authorities' propensity or ability to provide timely support to the banking sector.
HBON's Long-Term IDRs and SR are sensitive to a change in Fitch's view of HSBC's ability or propensity to provide support. In addition, the IDRs are also sensitive to increasing transfer and convertibility risks in Oman.
The senior debt ratings are sensitive to the same factors as those that affect the IDRs.
VR
BM's VR is the highest in Oman and is constrained by the operating environment. A downgrade of the VR would most likely be a result of a deteriorating operating environment, particularly should that lead to worse asset quality or an inability to generate stable earnings through the cycle.
Weakening of NBO's liquidity or significant worsening of asset quality could put pressure on the VR. An upgrade of the VR is unlikely given the difficult operating environment.
HBON's VR is sensitive to material deterioration of asset quality, although this is not Fitch's expectation.
An upgrade of bank Dhofar's VR would be contingent on the bank significantly strengthening its franchise in Oman and its capitalisation. Downward pressure would most likely be a result of weakening capital or worsening asset quality.
Bank Sohar's VR is sensitive to further deterioration of its funding profile or weakening capital, whether as a result of rapid growth or asset quality weakening, although this is not Fitch's expectation. A prolonged delay in deciding on the merger with Bank Dhofar could be negative for the VR should that lead to difficulties in planning and implementing a viable strategy in the meantime.
ABO's VR is sensitive to further tightening of liquidity and increasing reliance on interbank markets to fund its loan book. Capitalisation is also just adequate given the bank's high loan book concentration and the VR is sensitive to capital deterioration, or significant worsening of asset quality. Given the bank's fairly small franchise in Oman, an upgrade of the VR is not likely.
The rating actions are as follows:
Bank Muscat
Long-term foreign currency IDR affirmed at 'BBB+', Outlook revised to Negative from Stable
Short-term foreign currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
Senior unsecured notes affirmed at 'BBB+'
Long-term senior unsecured - EMTN programme affirmed at 'BBB+'
Short-term senior unsecured - EMTN programme affirmed at 'F2'
HSBC Bank Oman
Long-term foreign currency IDR downgraded to 'A' from 'A+', Outlook Negative
Short-term foreign currency IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '1'
Bank Dhofar
Long-term foreign currency IDR affirmed at 'BBB', Outlook revised to Negative from Stable
Short-term foreign currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Long-term senior unsecured - EMTN programme affirmed at 'BBB'
Short-term senior unsecured - EMTN programme affirmed at 'F2'
National Bank of Oman
Long-term foreign currency IDR affirmed at 'BBB', Outlook revised to Negative from Stable
Short-term foreign currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Ahli Bank SAOG
Long-term foreign currency affirmed at 'BBB', Outlook revised to Negative from Stable
Short-term foreign currency IDR affirmed at 'F2'
Long-term local currency IDR affirmed at 'BBB', Outlook revised to Negative from Stable
Short-term local currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Bank Sohar
Long-term foreign affirmed at 'BBB'; Outlook revised to Negative from Stable
Short-term foreign currency IDR affirmed at 'F2'
Viability Rating downgraded to 'bb' from 'bb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Contact:
Primary Analyst
Laila Sadek
Director
+44 20 3530 1308
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analysts
Maria Irusta Barasoain (BM, NBO, Bank Dhofar, Bank Sohar, HBON)
Analyst
+44 20 3530 1283
Secondary Analysts
Joao Correia de Matos (ABO)
Analyst
+44 20 3530 1723
Committee Chairperson
Jens Hallen
Senior Director
+44 20 3530 1326
Media Relations:
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London,
Tel: +44 203 530 1153,
Email: elaine.bailey@fitchratings.com;
Rose Millburn,
London,
Tel: +44 203 530 1741,
Email: rose.millburn@fitchratings.com.
Additional information is available on www.fitchratings.com
© Press Release 2016
