Fitch Ratings has affirmed Oman-based Bank Sohar’s long-term issuer default rating (IDR) of ‘BBB+’ with a stable outlook. The agency has simultaneously affirmed the bank’s short-term IDR of ‘F2’, viability rating of ‘bb+’, individual rating of ‘C/D’, support rating of ‘2’ and support rating floor of ‘BBB+’.
Bank Sohar’s IDRs and Support Rating reflect Fitch’s expectations of a high probability of support, if needed, from the Omani government, given its large direct and indirect stake in the bank (46% via various entities at end-2010) and the bank’s systemic importance.
The Viability Rating considers Bank Sohar’s improving earnings and profitability in line with its widening franchise and market share. The rating is constrained by high concentrations in loans and deposits, weaker asset quality trends, past rapid loan growth (in order to gain a viable market share) as well as tight liquidity and capital indicators.
Although being a relatively new bank, Bank Sohar (which commenced operations in 2007) has performed well, driven by continuing loan expansion, although rising loan loss provisions and still high operating costs mean that future profitability is likely to be moderate, at least in the near term.
Asset quality ratios remain sound so far, although absolute non-performing loans (NPLs) are rising, mainly in retail banking, reflecting past rapid loan growth. Although Bank Sohar’s NPL ratio (Q111: 0.9%) is the lowest in Oman due to its recent book, Fitch expects asset quality to remain pressured as the book seasons. The bank is also sensitive to concentration risks in its loan book, with the jump in NPLs during 2010 partly attributed to a single corporate default during the year. Fitch gains comfort from the bank’s solid reserve coverage ratios.
Fitch core capital continued to decline (Q111: 10.2%) reflecting low retained earnings and continuing loan growth. Given the high name and sector concentrations in the loan portfolio, Fitch considers capital to be relatively tight and potentially a negative rating factor. Furthermore, its Tier 1 ratio was a relatively low 10.2% at end-Q111 compared to similarly rated banks and Omani peers. The bank’s regulatory capital ratio was healthy at 15.9% at end-Q111, boosted by a subordinated loan raised in 2010, which counts as Tier II capital. Cash dividend payouts remain on the high side.
Customer deposits declined in Q111 due to the bank shedding some expensive institutional deposits, which had a positive impact on its net interest margin. However, this led to some tightening in balance sheet liquidity with its Fitch calculated loans/deposits ratio rising to 101% at end-Q111. Fitch nevertheless has no major concerns on liquidity given Bank Sohar’s improving funding profile, healthy liquid asset position and the solid growth in stable retail deposits in the last few quarters.
Headquartered in Muscat, Bank Sohar is a retail and corporate bank licensed by the Central Bank of Oman. Listed on the Muscat Securities Market, its largest single shareholder with 15% is Al Ghadeer Investments, a private investment vehicle. The Omani government holds a large direct and indirect stake in the bank, but no overall control.
Domestically, Bank Sohar competes in almost all products and segments with other major banks. After reaching a critical size and becoming profitable for the first time in 2009, the bank intends to expand in remittances, bancassurance and investment banking to further diversify its business.