The rating affirmation and assignment of a Negative Outlook on the Long-Term IDR reflects the failure by CBQ to achieve a majority stake in NBO. As a result, NBO's IDRs will remain driven by the bank's standalone credit strength, as indicated by a 'bb-' Viability Rating (VR). The Negative Outlook mirrors that on the Omani sovereign (BB-/Negative) due to the high correlation between the sovereign and the bank's credit profile. The Negative Outlook on the sovereign reflects continued erosion of its fiscal and external balance sheets, which have accelerated amid low oil prices and the coronavirus pandemic, despite some progress on underlying fiscal consolidation.
The Negative Outlook on NBO's rating also captures downside risks to the VR from a weakening domestic operating environment, which we expect to result in deterioration in asset quality as well as pressure on earnings, capitalisation and funding and liquidity.
Following the cancellation of CBQ's offer, the SR continues to be based on potential sovereign support and reflects a limited probability of extraordinary support from the Omani sovereign in case of need. Fitch believes that the sovereign's ability to support the banking system has weakened, driven by a significant widening of the fiscal deficit, which Fitch expects to be exacerbated by the pandemic and lower oil prices. The continued erosion of Oman's fiscal and external balance sheets reduces the sovereign's financial flexibility to provide support.
Nonetheless, Fitch believes the Omani authorities' propensity to support NBO remains high, partly because of high contagion risk (small number and high concentration of banks in the system) and the importance of the banking system in building the local economy.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A revision of the sovereign's Outlook to Stable, combined with a sustained improvement in economic growth and diminishing pressure on asset quality and profitability, cushioning the bank's capitalisation, could result in a revision of the Outlook on NBO's IDR to Stable.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
NBO's ratings could be downgraded in the event of prolonged deterioration in the Omani economy that leads to a significant further weakening of the bank's asset quality and ability to generate capital organically.
The ratings would be downgraded if NBO's CET1 ratio looks set to fall below current levels without a clear path for a return to previous levels of about 12% within 18-24 months and/or materially higher levels of capital encumbrance by unreserved impaired loans.
The ratings could also come under pressure if a funding stress materialises, particularly if we see significant amounts of government deposits exiting the banking system.
Given the bank's very high direct exposure to Oman, a downgrade of the sovereign rating could also lead to a downgrade of NBO's ratings.
NBO's SR is sensitive to a change in Fitch's assumptions around the Omani authorities' propensity or ability to provide timely support to the banking sector or the bank.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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