News Column

Fitch Ratings affirms Bank Sohar at 'BBB+'; Outlook Stable

June 24, 2014



Fitch Ratings has affirmed Oman-based Bank Sohar's Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. The Viability Rating (VR) has been affirmed at 'bb'.

KEY RATING DRIVERS - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

Bank Sohar's Long-term and Short-term IDRs are support-driven. Its IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation that there would be a high probability of support for the bank, if needed, from the Omani authorities, underpinned by Fitch's belief that there would be a strong willingness to maintain stability in the banking system.

RATING SENSITIVITIES - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

The IDRs, SR and SRF are sensitive to a change in Fitch's assumptions around the Omani authorities' propensity or ability to provide timely support to Bank Sohar.

KEY RATING DRIVERS - VR

Bank Sohar'sVR reflects its capitalisation, which is weaker than its peers, particularly in view of high loan book concentrations. The VR also factors in a stable operating environment, and the bank's relatively conservative risk appetite translating into sound asset quality.

Capitalisation remains relatively weak compared with peers, with a Fitch core capital ratio of 10.4 per cent at end-2013. However, Fitch expects growth to remain relatively moderate and for dividends to remain low, which should help boost capitalisation. Loan quality ratios for Fitch-rated Omani banks are generally sound, and Bank Sohar's are consistently among the strongest (NPL ratio of 1.07 per cent at end-1Q14).

Bank Sohar is primarily funded by customer deposits, and liquidity is sound. Deposits are concentrated, which is common in the region, particularly to the government, but tend to be stable despite their short maturities. The bank continued to report solid growth in earnings and profitability in 2013 and 1Q14. Net income grew by 17 per cent in 2013, driven by increases in both net interest and fee income.

RATING SENSITIVITIES VR

The relatively low capitalisation is the key negative driver for the bank's VR, and a downgrade of the VR would most likely be driven by reduced capitalisation, although this is not Fitch's expectation. In many other respects Bank Sohar's metrics are consistent with a higher VR and this could be achieved once the bank has taken steps to strengthen its capital. In addition, a resolution of the merger discussions with Bank Dhofar would be positive in that it would remove any uncertainty surrounding Bank Sohar's strategy and capital raising plans.


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Source: CPI Financial


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