Fitch affirms Bank Sohar at BBB+
Fitch Ratings has affirmed Oman-based Bank Sohar’s long-term issuer default rating (IDR) at ‘BBB+’ with a stable outlook. The agency has simultaneously downgraded the bank’s Viability Rating (VR) to ‘bb’ from ‘bb+’.
Fitch in a statement said that Bank Sohar’s IDRs and support rating reflect a high probability of support from the Omani government, given the state’s large direct and indirect stake in the bank (42% via various entities at end-2011) and the bank’s systemic importance (fifth-largest by assets). Fitch also recognises the strong track record of support for the Omani banking system from the Central Bank of Oman (CBO) which is a capable and conservative regulator. “The IDRs and Support Ratings remain sensitive to a change in Fitch’s assumptions around the ability or propensity of the Omani government to provide extraordinary support to the bank if needed,” the statement added.
“The VR has been downgraded primarily due to the continuing decline in Bank Sohar’s Fitch core capital ratio (end-March 2012: 9.4%) to a level no longer consistent with a ‘bb+’ level.”
Fitch considers the bank’s core capital ratio as low in the context of high borrower concentrations in its loan book, continuing rapid asset growth and low internal capital generation. Fitch also views negatively the still high concentration risks in deposits, potentially making its currently adequate liquidity position vulnerable to large swings in customer deposits. However, the agency takes some comfort from the fact that several of the bank’s large depositors are from government-related entities, which tend to be sticky.
“Bank Sohar’s earnings and profitability are strengthening in line with its widening franchise and market share and these trends are likely to continue. Fitch also recognises the bank’s success in growing its deposit base in the past few quarters, particularly in low cost and stable retail deposits, which has in turn improved its funding profile.”
Fitch believes the bank’s VR remains sensitive to further pressure on its core capital ratio if current rates of growth persist. In the agency’s view, the bank has limited scope to reverse this trend due to its current expansion strategy and the bank, like all other banks in Oman is booking corporate business on the back of the government’s spending. The bank plans to raise OMR10m through a rights issue in Q412 specifically for the launch of its new Islamic window, which although positive, has a limited and potentially temporary benefit on its core capital ratios as Fitch believes the bank is expected to grow this business rapidly. The VR could benefit from consistently stronger core capital ratios and a permanent reduction in risk concentrations. Regulatory capital ratios remain above CBO requirements.
Fitch notes that absolute NPLs are rising, mainly in retail banking, reflecting past rapid loan growth. Although Bank Sohar’s NPL ratio (end-March 2012: 1.5%) 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 high concentration risks in its loan book, with some of the recent rise in NPLs attributed to several large bad loans. Reserve coverage continues to be high and provides a good buffer for potential further asset quality deterioration.
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