Fitch Ratings has affirmed Oman-based Bank Dhofar’s (BD) ong-term issuer default rating (IDR) at BBB+ with a stable outlook. The viability rating (VR) has been affirmed at bb.
BD’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s view of the high probability of support being available from the Omani authorities if needed, given the strong history of support for the banking system from the regulator, the Central Bank of Oman (CBO) and the bank’s systemic importance.
These ratings are sensitive to a change in Fitch’s view of the willingness or ability of the Omani state to provide support.
The VR reflects BD’s high concentration on both sides of the balance sheet (although BD’s concentration levels are better than most peers), relatively modest capitalisation and reliance on wholesale deposits. It also reflects its good franchise, solid operating profitability, sound asset quality and adequate liquidity.
BD’s operating return on assets remains solid at around 2%, and compares well with peers. The bank continued to report solid growth in earnings in 2012 and Q113, although largely offset by rising costs and – at least in 2012 – a slight increase in impairment charges. Overall profitability growth was moderate, with operating profit rising by 2.4% in 2012, and 3.6% year-on-year in Q113. Impairment charges increased slightly in 2012, but remained moderate at 9% of pre-impairment operating profit (7% in Q113).
Asset quality is sound, in line with most peers; the impaired loan ratio has shown consistent improvement over the past few years. Impaired loans amounted to OMR54.1m at end-Q113, about 3% of the loan book. The ratio is in line with most of the bank’s peers. Loan reserve coverage remained strong at 137% at end-Q113. Loans past due but not impaired dropped to OMR12.3m at end-2012 (around 0.7% of gross loans). Most of these were less than 60 days overdue and are more technical delays than potential problems.
Customer deposits continued to rise, by 14% in 2012, almost matching loan growth. Growth was split fairly evenly between corporate and retail; at end-Q113 about 17% of total deposits were retail. There is very high deposit concentration, but positively, the larger deposits are mostly sourced from the government and the public sector and tend to be stable despite having relatively short maturities. This mitigates liquidity risk to some extent.
BD remains modestly capitalised with a Fitch core capital ratio of 11.8% and a Tier 1 ratio of 10.4% at end-Q113. BD’s total capital adequacy ratio of 14.3% at end-Q113 was above the 12% required by the CBO. Cash dividends for 2012 amounted to about 44% of 2012 net income, fairly reasonable in the regional context, where dividend payments tend to be high. With continued growth, BD’s capitalisation could come under pressure, if the bank does not strengthen its internal capital generation or raise capital externally.
Upside for the VR would be possible if capitalisation strengthens, with continued development of the bank’s franchise and focus on maintaining sound asset quality. BD’s VR would also be sensitive to the outcome of the current merger discussions with Bank Sohar, which would make a material difference to the bank’s franchise in Oman. Downward pressure on the VR would arise if the bank’s capitalisation weakens. Fitch could also downgrade the rating if asset quality deteriorated faster than the agency’s current expectations.
At end-Q113, BD was the fourth-largest bank in Oman by assets, with a market share of around 11% by assets. Listed on the Muscat Securities Market, the bank is about 27.8% owned by a local investment company (Dhofar International Development and Investment Holding Company) and 28.7% owned by a number of government pension funds. The remaining shares are held by corporate and private Omani shareholders.