(MENAFNEditorial) 30th May 2016
Bank Sohar's Ratings Lowered; Outlook Revised to 'Negative' from 'Stable'
Capital Intelligence Ratings (CI Ratings), the international credit rating agency, today announced that in line with the very recent downgrade of the Sultanate of Oman's sovereign rating ('A-'/'A2'/'Negative') and the substantial weakening of key liquidity indicators, it has lowered Bank Sohar S.A.O.G's Financial Strength Rating (FSR) to 'BBB-' from 'BBB'. The revised rating is largely supported by the good loan asset quality indicators, notwithstanding a weakening at end Q1 2016 and the sound capital adequacy ratio (CAR), together with the good total capital to total assets ratio and the better than peers internal capital generation reflecting the relatively low dividend payout policy. The support of its major shareholder via a capital increase in 2015 is a positive, although this had only a moderate impact, and the sustained robust credit expansion had kept the Bank's CAR at just an adequate level.
The Bank's FSR is constrained by the tight liquidity ratios, in particular the high loan based liquidity ratios and the low net liquid asset ratio at end 2015 and Q1 2016, as well as the decline of profitability ratios to a relatively low level compared to peers. An ongoing constraint on the Bank's rating relates to concentrations in both the loan book and the deposit base, although this is in common with its peers and the sector.
Following the action above, CI Ratings has also lowered the Bank's Long-Term Foreign Currency Rating (FCR) to 'BBB' from 'BBB+'. The Bank's Short-Term FCR is however maintained at 'A3' and so is the Support Rating of '2'. The latter reflects the high likelihood of support from the government in the case of need.
A 'Negative' Outlook is assigned to all the ratings, which is in line with its peers and largely reflects the weakening of the operating environment for banks as indicated by the slowdown of economic growth, as well as the potential impact on loan asset quality going forward. The 'Negative' Outlook also reflects the possible tightening of market liquidity given the issuance of bonds and treasury bills by the government, the decline in government deposits in the banking system, as well as reduced investor confidence.
At end Q1 2016, Bank Sohar remained the fourth largest bank in Oman in terms of assets with a sizeable direct and indirect government ownership. Asset growth moderated in line with the sector amid the slowing down of the domestic economy. Loan expansion however continued at a fairly robust pace. The improvement of loan asset quality in 2015 was a positive and contrasted favourably with its peers, although a weakening was seen in Q1 2016. Nonetheless, the Bank's non-performing loan (NPL) ratio remained among the lowest and its good loan loss reserve and effective NPL coverage ratios remained higher than a number of its peers at end Q1 2016.
A major negative factor and one which weighs heavily on the Bank's ratings is the impact of the sustained solid loan growth on liquidity, especially in light of the anticipated tightening of market liquidity. While the contraction of customer deposits was largely in line with the Bank's strategy to diversify funding sources, improve customer deposit mix and lower customer concentration, this has nonetheless led to a substantial tightening of loan based liquidity ratios. In addition, with loans growing at the expense of liquid asset holdings, the Bank's liquid asset holding indicators have also declined in the periods under review. The Bank's net loans to customer deposits and net loans to stable funds ratios rose to a high level and were above the peer group average. The high and increasing level of interbank borrowings has lowered the Bank's net liquid asset ratio to the lowest seen in the peer group.
 
As for earnings, the Bank registered its first decline in net profit in 2015 and this continued in Q1 2016. The weaker performance in 2015 was contributed by the narrowing of net interest margin and a contraction of non-interest income (NII). Good cost control and low risk charge helped to contain the decline of net profit to a fairly modest level. In Q1 2016, NII contracted further, leading to a decline of gross income. Given the increase in operating expenses and impairment charges, the Bank posted a larger contraction of net profit. While remaining satisfactory by international standards, the Bank's profitability ratios, at both the operating and net levels, declined in the periods under review and were lower than most of its peers.
The Bank plans to raise Tier 1 and Tier 2 Capital to shore up CAR to a more comfortable level by year end 2016. At the time of writing, a moderate level of Basel III compliant subordinated borrowing is nearing completion; however, the Tier 1 Capital issue has been postponed until after the outcome of the pending merger with Bank Dhofar. With the fairly sound financial metrics of Bank Dhofar, the merger is unlikely to have a negative impact on the Bank's ratings.
Bank Sohar was established in 2007 by a group of investors led by The Royal Court Affairs (RCA), a government body. The RCA is the single largest shareholder with a nearly 15% stake; the government, through the RCA, Oman's sovereign wealth fund and various pension funds together own more than 40% of the Bank. No single shareholder or group exercises management control. The Bank's shares are listed on the local stock exchange. At end Q1 2016, the Bank had total assets of OMR2.21 billion (USD5.74 billion) and an equity base of OMR0.25 billion (USD0.65 billion). The Bank also reported a net profit of OMR4.16mn (USD10.83mn) for the first three months of this year, which represented a year-on-year decline of 36.81%.
CONTACT
Primary Analyst
Agnes Seah
Credit Analyst
Tel: +357 2534 2300
E-mail: agnes.seah@ciratings.com
Secondary Analyst
Karti Inamdar
Senior Credit Analyst
E-mail: karti.inamdar@ciratings.com
Rating Committee Chairman
Morris Helal
Senior Credit Analyst
The information sources used to prepare the credit ratings are the rated entity and public information. CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in July 2012. The ratings were last updated in June 2015.
The principal methodology used in determining the ratings is the Bank Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu.
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