Fitch Ratings has downgraded Bank Muscat’s (BM) Viability Rating to ‘bbb’ from ‘bbb+’ and affirmed the bank’s long-term issuer default rating (IDR) at ‘A-‘. The outlook on the long-term IDR is stable.
BM’s Long- and Short-term IDRs reflect Fitch’s view that there would be an extremely high probability of support from the Omani authorities in case of need. This view is based on the bank’s systemic importance, the government’s large shareholding and the strong history of support for local banks from the Central Bank of Oman (CBO).
The downgrade of the Viability Rating (VR) to ‘bbb’ reflects Fitch’s belief that funding could become more challenging for BM if lending growth picks up in line with the strengthening Omani economy. This scenario is likely given the Omani government ramping up public spending as part of its latest five-year plan (2011-2015), which will substantially increase business volumes for the banking sector. As customer deposits for the Omani market as a whole are not expected to grow as quickly as loans, BM’s loans/deposit ratio could worsen. Moreover, increasing competition in Oman, particularly from new entrants, could result in some loss of deposits at BM.
Fitch also believes that BM’s participation in long-term project and corporate deals could increase the contractual maturity gap between assets and liabilities, if access to long-term funding is limited. As it stands, BM relies somewhat on large volumes of contractually short-term customer deposits to fund its increasingly longer-term loan book. However, these deposits (sourced mainly from Oman government-related entities and the public sector), tend to be stable, therefore reducing any immediate liquidity risks for the bank.
In addition, significant expansion of the bank’s loan book will put pressure on the bank’s Fitch core capital and Tier 1 capital ratios (12.6% and 10.7% at end-H111), which will need further strengthening in the future.
BM has had limited success with its overseas operations, although some are in a start-up phase. Nevertheless, BM continues to benefit from its strong domestic franchise and dominant market share. Core earnings are healthy and the bank remains profitable (operating profit increased by 22% in H111 yoy). The Omani economy is gradually recovering and therefore asset quality for all Omani banks could improve in the medium term. Non-performing loans at BM were fully covered by reserves at end-H111.
Established in 1982, BM is by far the largest bank in Oman with a 37% market share at end-H111. The bank is 39% owned (directly and indirectly) by the Omani government.