Fitch Ratings has affirmed Bank Dhofar’s (BD) long-term Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook and Short-term IDR at ‘F2’. Simultaneously, the agency has downgraded BD’s Viability Rating (VR) to ‘bb’ from ‘bb+’.
BD’s IDRs, Support Rating and Support Rating Floor reflect the high probability of support from the Omani authorities, in case of need, given the government’s strong supportive stance towards the domestic system and the bank’s systemic importance.
As the IDRs are at their Support Rating Floor, they would be sensitive to changes in Fitch’s perception of the willingness or ability of the state of Oman to support BD.
The downgrade of the VR reflects Fitch’s expectation that the bank’s capitalisation will continue to weaken because of the forecast high loan growth, with only moderate internal capital generation. Furthermore, BD’s capitalisation has to be considered in the context of high borrower concentrations, which exposes the bank to significant event risk. Despite the downward trend, the bank’s regulatory capital ratios remain above CBO requirements.
Excluding a large one-off charge in 2011, operating profitability remained stable in 2011. With a cost/income ratio of 42% at end-Q112, expenses remain well controlled compared with peers.
BD’s asset quality improved in 2011, as the bank’s NPL ratio fell to 3.6% and the level of restructured loans moderated. However, strong loan growth in recent years gives rise to a high and increasing proportion of unseasoned loans on BD’s book. BD’s relatively high real estate exposure could also put some pressure on asset quality.
Customer deposits accounted for a high 90% of non-equity funding at end-H112 but are highly concentrated, with the 20 largest depositors accounting for 58% of the total. The largest deposits were mainly from the government and government pension funds, which have proven sticky in the past, but also link the robustness of the bank’s funding profile to the Omani sovereign.
Fitch believes the bank’s VR remains sensitive to greater than expected pressure on capital, deriving from its expansion strategy during a period when the government of Oman is increasing spending. On the other hand, a reversal in capital trends, combined with a permanent reduction in risk concentrations could result in an upgrade in the VR.