Muscat – Fitch Ratings has upgraded Bank Muscat’s long-term issuer default ratings (IDRs) to ‘BB’ from ‘BB-‘ and HSBC Bank Oman’s long-term IDRs to ‘BB+’ from ‘BB’. The outlooks are stable for these two banks, the rating agency said on Wednesday.

Fitch has also upgraded Bank Muscat’s viability rating to ‘bb’ from ‘bb-‘ and its government support rating to ‘bb-‘ from ‘b+’. HSBC Oman’s shareholder support rating has been upgraded to ‘bb+’ from ‘bb’ and its viability rating affirmed at ‘bb-‘.

The stable outlook on HSBC Oman’s long-term IDRs mirrors that on the Omani sovereign rating, Fitch noted.

Fitch has also affirmed the long-term IDRs and viability ratings of National Bank of Oman (NBO), BankDhofar, Sohar International Bank, and Ahlibank.

‘The affirmation of viability ratings reflects our view that the improved operating environment in Oman does not have a sufficient impact on the banks’ intrinsic credit profile to warrant an upgrade. This considers weaknesses in asset quality and profitability metrics that are still lagging Bank Muscat’s,’ Fitch said in a statement.

The six banks’ short-term IDRs have been affirmed at ‘B’ by Fitch.

Fitch said its rating actions on Omani banks follow the upgrade of Omani sovereign to ‘BB’ on August 15 and its subsequent reassessment of the government support rating for domestic systemically important banks (D-SIB) in Oman to ‘b+’ from ‘b’, reflecting a stronger ability of the Omani authorities to support the local banking system.

The rating agency has also revised its assessment of the Omani banks’ operating environment score to ‘bb’ from ‘bb-‘, signalling improvements in operating conditions in the context of higher oil prices, which will ‘drive credit demand and ease pressures’ on banks’ financial profiles.

The recent upgrade of Oman’s sovereign rating, Fitch said, reflected significant improvements in the country’s fiscal metrics, lessening of external financing pressures and ongoing efforts to reform public finances.

According to Fitch, Bank Muscat’s long-term IDRs are driven by its viability rating. The bank’s viability rating, Fitch said, reflects its dominant position in Oman with significant market shares across retail and commercial banking (about 35 per cent market share).

‘Bank Muscat benefits from its flagship status and close links to the government, which gives it access to high quality borrowers and funding from the government and its related entities. The viability rating also considers the bank’s resilient asset quality, sound profitability and capitalisation, as well as stable funding and good liquidity,’ the rating agency said.

For HSBC Oman, the bank’s IDRs and shareholder support rating are driven by Fitch’s expectation of a moderate probability of support available to the bank from its ultimate parent, HSBC Holdings.

‘This reflects HSBC’s strong ability to support HSBC Oman, and HSBC Oman’s small size relative to the group. This view is supported by HSBC Oman’s role in the group, providing products and services in a market identified as important to HSBC in the Middle East,’ Fitch said.

HSBC Oman’s viability rating reflects the bank’s adequate franchise and business model benefiting from its links with HSBC, conservative risk profile, resilient asset quality, sound capitalisation, stable funding and adequate liquidity, Fitch added.

On the other hand, Fitch said the issuer default ratings of BankDhofar, NBO, Sohar International Bank and Ahlibank are driven by their viability ratings.

The Omani government’s ability to support the banking system has moderately improved, as reflected by its recent upgrade, but remains limited, in Fitch’s view. The sovereign’s net foreign assets remain negative and are expected to turn marginally positive in 2022, after deteriorating dramatically to 9 per cent of GDP in 2020 from 53 per cent in 2014, the rating agency said.

‘In addition, medium-term funding requirements remain sizeable and Oman’s level of external indebtedness is high. We forecast gross external debt-to-GDP ratio at 92 per cent in 2022, compared with a ‘BB’ median of 55 per cent. This reduces the sovereign’s financial flexibility to provide support to its local banks,’ Fitch noted.

Nonetheless, Fitch believes the Omani authorities’ propensity to support 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.