Muscat – Fitch Ratings has revised ahlibank’s outlook to ‘stable’ from ‘negative’ and affirmed the bank’s long-term issuer default rating at ‘B+’. Fitch has also affirmed the bank’s viability rating at ‘b+’.

The rating actions follow a similar action on Oman’s sovereign rating on December 20, 2021. Fitch has also revised its outlook on the Omani operating-environment score to stable from negative.

‘The outlook revision reflects our view that pressures on the operating environment from the pandemic and lower oil prices have eased sufficiently, and that the bank’s financial metrics have been resilient in the past quarters, despite these pressures,’ Fitch said.

Fitch has withdrawn ahlibank’s support rating and support rating floor as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on November 12, 2021. In line with the updated criteria, we have assigned ahlibank a government support rating of ‘b’.

ahlibank’s issuer default ratings are driven by the viability rating. ‘The viability rating of ahlibank reflects its more limited franchise than peers’, with a smaller albeit growing branch network, weaker capitalisation and funding profile than peers’, and high concentrations on both sides of its balance sheet, exposing the bank to event risk,’ the ratings agency said.

ahlibank’s loan quality has been stable to date, despite being under pressure from the operating environment in recent years, albeit reduced in 2021. Stage 3 loans under IFRS 9 rose slightly to 3.2 per cent of gross loans at end-2021, from 2.9 per cent at end-2020, the lowest among Fitch-rated banks.

Stage 2 loans represented 19 per cent of end-2021 gross loans, unchanged from end-2020’s. ‘This is high by global comparison but is in line with domestic peers’, reflecting conservative classification policies at Omani banks. Our assessment of asset quality also incorporates ahlibank’s high loan growth and sector concentrations, including to the more volatile construction and real estate sector,’ the ratings agency added.

‘We also factor in ahlibank’s specific coverage of impaired loans at 59 per cent at end-2021, which is at the lower end of the peers’ range, reflecting the bank’s reliance on collateral, while the coverage of impaired loans by total reserves was a reasonable 98 per cent,’ Fitch said.

According to Fitch, ahlibank’s profitability is structurally weaker than peers’, due to the bank’s higher reliance on term deposits resulting in a higher cost of funding (3.2 per cent) and thus a lower net interest margin (2.4 per cent) in 2021.

In 2021 ahlibank’s operating profit/risk-weighted assets increased to 1.3 per cent against 1.1 per cent reported in 2020. That was driven by decreased cost of risk, on the back of a stabilising economic environment and business growth, a 10 per cent year-on-year increase in net interest income on similar loan growth, and a recovery in net fees and commissions to pre-pandemic levels seen in 2019.

In 2021 loans and securities impairment charges were 31 per cent of pre-impairment operating profit, down from 35 per cent in 2020, but still higher than pre-pandemic levels.

‘Following greater buffers to minimum requirements we have upgraded ahlibank’s capitalisation and leverage score to ‘b+’ from ‘b’,’ said Fitch

‘The bank’s total capital ratio of 17.31 per cent at end-2021 (end-2020: 15.7 per cent) provides greater headroom above current regulatory minimum requirements, boosted by the issue of additional Tier 1 instruments,’ the agency explained.

Nonetheless, Fitch believes the Omani authorities’ propensity to support ahlibank and the banking sector is high because of high contagion risk in the sector, the role the banking sector plays in financing the economy and the authorities’ drive to preserve financial stability as the country implements its economic development plans.