Fitch Ratings has affirmed Bank Muscat’s (BM) Long-term Issuer Default Rating (IDR) at A- and Viability Rating (VR) at bbb. The outlook on the long-term IDR is stable.
BM’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s view of the extremely 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. Fitch’s view of support also considers BM’s systemic importance (c.40% market share of assets) as well as the government’s large shareholding in the bank.
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 BM’s dominant franchise, which translates into leading market shares in Oman. Given its size and ownership structure, BM benefits from preferential access to government-sponsored business and funding, although transactions are on a commercial basis. The rating also recognises the bank’s consistently good operating profitability and asset quality. The rating is constrained by high borrower concentrations and fairly tight balance sheet liquidity due to fast loan growth.
BM’s net profit grew by 20% yoy in 2012, driven by volume growth and continuing low cost of funding, outpacing tightening asset margins. Solid fee income generation and falling loan impairment charges also contributed to the bottom line. In Q113, net profit fell by 25% due to a OMR14.9m (USD40m) one-off loss relating to a major fraud at its card processor in India, to which BM had outsourced some its pre-paid travel card operations. However, the bank’s healthy operating profitability enabled it to absorb the loss with no significant impact on its financial metrics or risk profile. We expect the bank’s prospects to continue to benefit from the growing Omani economy and its strong domestic position.
Non-performing loans (NPL) increased in 2012, albeit moderately, due to a weaker corporate lending, highlighting the borrower’s sensitivity to concentration risk. However, its NPL ratios have remained constant at around 3% since 2011 and we are not expecting this to change significantly given BM’s strategic core customer base and the favourable outlook for the operating environment. Fitch’s main concern for asset quality is the bank’s high borrower concentrations, which expose it to event risk, although this is mitigated as many large exposures are Oman government-related. Faster growth in new segments, particularly in the SME sector owing to new prudential regulations could lead to some weakening in asset quality over time.
BM has a strong funding profile, with a large and stable customer deposit base (77% of non-equity funding) complemented by a range of wholesale funding. However, from a liquidity perspective, its loans/customer deposits ratio is relatively high (Q113: 105%), and unlikely to reduce significantly during the year.
Capitalisation has strengthened after a OMR97m rights issue in 2012 and a subsequent private placement in 2013. BM’s Fitch core capital ratio was a comfortable 13.2% at end-Q113. If credit growth continues at its currently high level (up 16% in 2012), the capital benefit of the rights issue will not maintain the Fitch core capital ratio at its current level. Any more negative trends than Fitch’s base case assumptions could put pressure on Fitch’s assessment of the bank’s standalone strength.
BM’s VR is constrained by its reliance on Oman’s narrow economy and high loan concentrations. A material strengthening of capitalisation (in line with other leading regional banks), with continued development of the bank’s franchise and sound asset quality could lead to an upgrade, but this is potentially a longer-term scenario. Downward pressure on the VR could arise if performance consistently lags its peers and the bank’s Fitch core capital weakens faster than the agency’s current expectations. A general deterioration of the operating environment could also put pressure on the rating.
BM is the leading bank in Oman, 24% owned by the Royal Court Affairs. Other Oman government entities (mainly pension funds) own smaller stakes. The International Finance Corporation is a new shareholder following its acquisition of a 5.3% stake in H113. The bank is a clear market leader in retail and corporate banking, Islamic and International banking. Operations outside Oman, include a branch in Saudi Arabia and Kuwait and representative offices in Dubai and Singapore. BM also has strategic investments in BMI Bank BSC, Bahrain (49%), Muscat Capital LLP, Saudi Arabia (97.5%) and Mangal Keshav Securities, India (43%).