July 3, 2017 / 2:49 PM / 4 months ago

Fitch Revises 5 Omani Banks Outlooks to Negative; Affirms 6 IDRs

(The following statement was released by the rating agency) LONDON, July 03 (Fitch) Fitch Ratings has revised the Outlook on five Omani banks - Bank Muscat (BM), HSBC Bank Oman (HBON), Ahli Bank SAOG (ABO), Bank Dhofar (BD) and Bank Sohar (BS) - to Negative from Stable. The Outlook on National Bank of Oman (NBO) remains Stable. Fitch has also affirmed the Long-Term Issuer Default Rating (IDRs) of all six banks. A full list of rating actions is at the end of this rating action commentary. These rating actions follow the revision of the Outlook on the Omani sovereign to Negative (see 'Fitch Revises Oman's Outlook to Negative; Affirms at 'BBB' dated 19 June 2017 on www.fitchratings.com). KEY RATING DRIVERS IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT - ABO, BD and BS ABO's, BD's and BS' 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. Fitch believes Oman has the financial flexibility, albeit weakening due to lower oil prices, to support its banking system. The fiscal policy response to the drop in oil prices has not prevented a significant deterioration in public finances. Fitch believes the Omani authorities' willingness to support domestic banks 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. We view ABO (6% market share), BD (13%) and BS (8%) as domestic systemically important banks (D-SIBs) in Oman; their SRF is therefore equal to the 'BBB-' D-SIB SRF in Oman. The Negative Outlook on ABO's, BD's and BS's IDRs reflects that on the Omani sovereign rating. BD's senior debt ratings are driven by the same factors that drive its IDRs. IDRS, SR, SRF AND SENIOR DEBT - BM BM's Viability Rating (VR) is at the same level as the bank's SRF. Its IDRs are driven by the bank's intrinsic financial strength (as measured by the VR) and are underpinned by sovereign support. BM's SR and SRF reflect Fitch's expectation of a high probability of support from the Omani authorities in case of need. As the country's dominant bank with a 36% market share, BM's SRF is one notch above the D-SIB SRF, at 'BBB'. The Negative Outlook on BM's IDR reflects that on the Omani sovereign rating. The 'F3' Short-Term IDR of BM is the lower of two possibilities mapping to its 'BBB' Long-Term IDR. This is because approximately 35% of the bank's funding is related to the government and a stress scenario for the bank is likely to come at a time when the sovereign itself is experiencing some form of stress. BM's senior debt ratings are driven by the same factors that drive its IDRs. IDRS, SR AND SRF - NBO Although NBO's VR and SRF are at the same level, the Negative Outlook on the sovereign means the bank's IDRs are driven by its intrinsic financial strength, as measured by the VR, since its SRF could be revised lower in the event of a sovereign downgrade. NBO's SR and SRF reflect Fitch's expectation of a high probability of support from the Omani authorities in case of need. We view NBO (12% market share) as a D-SIB in Oman; its SRF is therefore equal to the 'BBB-' D-SIB SRF in Oman. The Stable Outlook on NBO reflects the expected stability of its VR, which would not be impacted by a one-notch sovereign downgrade. IDRS AND SR - HBON HBON's IDRs and SR are driven by our expectation of an extremely high probability of support available to the bank from its ultimate parent, HSBC Holdings (HSBC; AA-/Stable/aa-). This reflects HSBC's strong ability to support HBON, and HBON's manageable and negligible size as a share of total group assets. This view is supported by HBON's role in the group, providing products and services in a market identified as strategically important to HSBC. Our support view also factors in strong integration (including management, systems and risk practices), common branding and the high reputational risk that an HBON default would mean for HSBC. HBON's Long-Term IDR is capped by the Omani Country Ceiling, which captures transfer and convertibility (T&C) risk, and the Negative Outlook reflects that on the Omani sovereign rating. If T&C considerations did not apply, HBON's Long-Term IDR would be notched down once from HSBC's 'AA-' Long-Term IDR, with a Stable Outlook. The Negative Outlook on HBON reflects indirectly the Negative Outlook on the Omani sovereign as a sovereign downgrade is likely to be accompanied by a downgrade of the Country Ceiling. According to our criteria, a Long-Term IDR of 'A-' corresponds to a Short-Term IDR of either 'F1' or 'F2'. We have affirmed the 'F1' Short-Term IDR because we view the liquidity profile of HBON's parent as extremely strong. We do not assign a SRF to HBON because in our view the most likely source of extraordinary support for this bank is its shareholder and not the government authorities. SRFs are assigned to banks which would, in our opinion, receive extraordinary support from the government in the first instance. VRS The VR of BM is capped by the operating environment, its company profile and risk appetite, and more specifically by the Omani sovereign rating. BM is predominantly a domestic bank with significant links to the sovereign and domestic operating environment. The VR is underpinned by the dominant franchise of BM in Oman, which supports its ability to generate healthy operating profits, and despite a difficult operating environment, its sound and resilient asset quality. We also take into account its capital ratios with satisfactory buffers over regulatory minimums in light of some lending concentration, and a substantial depositor base with a strong retail component. Deposits are diversified compared with domestic and regional peers. Liquidity is stable and sound and is a focus for the bank. BM's management is one of the strongest in the country, with depth, stability and experience and sound execution of the bank's strategy. The VR of ABO is constrained by a weaker funding profile relative to peers, with high deposit concentration, greater reliance on wholesale markets to fund its loan book than peers, and tightening liquidity. The bank benefits from being part of the Ahli United Bank group and its wider regional network, notably in terms of depth, stability and experience of upper management. The bank's track record of resilient asset quality and performance compares well with peers'. The bank's VR also factors in the bank's satisfactory capital buffers above the minimum regulatory requirements, in light of high lending concentrations, as well as a moderate franchise in Oman. NBO's VR reflects a solid franchise in Oman, the depth, stability and experience of upper management, and less loan concentration compared with peers. We expect some pressure on asset quality from the operating environment, which could lead to higher loan impairment charges. However, NBO's cost efficiency and high net interest margins are likely to support profitability. The Fitch core capital (FCC) ratio is only adequate; however, measured risk appetite and growth targets underpin satisfactory regulatory capital buffers. The VR also factors in the bank's adequate and stable liquidity and diversified funding compared with some peers. HBON's VR is supported by the bank's company profile, which benefits from being part of the HSBC group for product offering, geographical reach and the depth, stability and experience of management. Sound buffers of regulatory capital and higher liquidity than peers 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, which is one reason for the bank's weak profitability, which remains below peer average but is continuously improving. Impaired loans remain fairly high compared with domestic peers, but these are primarily legacy loans and are well-covered by reserves. New impaired loans are reasonably limited. The bank's current more conservative underwriting standards should continue to support stable asset quality. The VR of BD reflects its tight capital buffers, above-peer average loan and deposit concentrations, and tight funding, with greater reliance on wholesale funding than higher-rated peers, which contributes to high funding costs. The VR also factors in the bank's sound Omani franchise, depth and stability of management, good cost control and resilient asset quality metrics. Nevertheless we expect some pressure on asset quality from the operating environment that could lead to higher loan impairment charges. The VR of BS reflects a weaker funding profile relative to peers, with high deposit concentration, higher balance of term deposits, and greater reliance on wholesale and interbank markets to fund its loan book than peers. It also factors in the bank's tight capital buffers in light of lending concentrations, limited liquidity and modest earnings. It also reflects high management turnover, some reliance on a few key individuals and the lack of a clear strategy following the end of merger talks with BD. Positively, BS' asset quality metrics have proved resilient. RATING SENSITIVITIES IDRS AND SENIOR DEBT - BM, ABO, BD and BS BM's IDRs are sensitive to a simultaneous downgrade of the bank's VR and SRF. ABO's, BD's and BS' IDRs are sensitive to a downgrade of their SRF. NBO's IDRs are sensitive to a downgrade of the bank's VR. The senior debt ratings are sensitive to the same factors that affect the IDRs. SRS AND SRFS - BM, NBO, ABO, BD and BS All five banks' 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. If the sovereign is downgraded by one notch all SRFs would also be revised down by one notch. IDR AND SR - HBON HBON's Long-Term IDR and SR are sensitive to a change in Fitch's view of HSBC's ability or propensity to provide support. A one notch downgrade of the Omani sovereign is also likely to result in a one notch downgrade of HBON's Long-Term IDR as Fitch's Country Ceiling, which captures T&C risk, is also likely to be downgraded. VRS BM's VR is the highest in Oman and is constrained by the challenging operating environment. A downgrade of the VR would most likely be a result of a sovereign downgrade or a deteriorating operating environment affecting BM's company profile and risk appetite, particularly should that lead to worsening 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. ABO's VR is sensitive to changes in the bank's funding and liquidity. HBON's VR is sensitive to material changes in asset quality and profitability metrics. An upgrade of BD's VR would be contingent on the bank significantly strengthening its franchise in Oman, its funding profile and its capitalisation. Downward pressure would most likely be a result of weakening capital, funding or asset quality. The VR of BS is sensitive to further deterioration of its funding profile or weakening capital, whether as a result of rapid growth or worsening asset quality, although this is not Fitch's expectation. A prolonged delay in setting a clear and well-defined strategy could be negative for the VR if that leads to a weakening financial profile. Upside to the VR is contingent on the bank significantly strengthening its funding profile and capitalisation. 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 'F3' Viability Rating affirmed at 'bbb' Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB' Long-term senior unsecured debt including EMTN programme affirmed at 'BBB' Short-term senior unsecured EMTN programme affirmed at 'F3' HSBC Bank Oman Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Revised to Negative from Stable Short-Term Foreign Currency IDR affirmed at 'F1' Viability Rating unaffected at 'bbb-' Support Rating affirmed at '1' National Bank of Oman Long-Term Foreign Currency IDR affirmed at 'BBB-', Outlook Stable Short-Term Foreign Currency IDR affirmed at 'F3' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB-' Ahli Bank SAOG Long-Term Foreign and Local Currency IDRs affirmed at 'BBB-'; Outlooks Revised to Negative from Stable Short-Term Foreign and Local Currency IDRs affirmed at 'F3' Viability Rating unaffected at 'bb+' Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB-' Bank Dhofar Long-Term Foreign Currency IDR affirmed at 'BBB-', Outlook Revised to Negative from Stable Short-Term Foreign Currency IDR affirmed at 'F3' Viability Rating unaffected 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 'F3' Bank Sohar Long-Term Foreign Currency IDR affirmed at 'BBB-', Outlook Revised to Negative from Stable Short-Term Foreign Currency IDR affirmed at 'F3' Viability Rating unaffected at 'bb' Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB-' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade, London, E14 5GN Secondary Analyst Gilbert Hobeika Associate Director +44 20 3530 1004 Committee Chairperson Eric Dupont Senior Director +33 1 4429 9131 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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