Muscat – Moody’s Investor Service has affirmed Sohar International Bank’s and HSBC Bank Oman’s deposit ratings, following the recent signing of a binding merger agreement between the two banks.

Moody’s affirmed Sohar International’s long-term foreign and local currency deposit ratings at Ba3. At the same time, the rating agency has maintained the outlook on the bank’s long-term deposit ratings at positive, which continues to reflect Moody’s positive outlook on the Omani government’s issuer ratings.

‘The affirmation of Sohar International’s long-term deposit ratings at Ba3 reflects the affirmation of its baseline credit assessment (BCA) and adjusted BCA at ba3, which are at the same level as the sovereign rating. As a result, there is no government support uplift for the bank’s deposit ratings despite Moody’s assessment of a very high likelihood of government support in case of need,’ the ratings agency said.

The affirmation of the BCA at ba3 for Sohar International, captures the rating agency’s view that the forthcoming merger between Sohar International and HSBC Oman is broadly credit neutral, Moody’s noted.

On the other hand, Moody’s affirmed HSBC Oman’s long-term local and foreign currency deposit ratings at Ba2, its adjusted BCA at ba2 and its BCA at ba3. The rating agency changed the outlook on HSBC Oman’s long-term deposit ratings to developing from positive.

‘The developing outlook on HSBC Oman captures the differing directions in which the merger and the positive outlook on the Oman sovereign rating could affect its ratings. The finalisation of the merger would result in the bank’s deposit ratings being downgraded to the same level as Sohar International, as the two banks are merged and HSBC Oman ceases to exist,’ Moody’s said.

The merger between Sohar International and HSBC Oman – which remains subject to the regulatory bodies and shareholders’ approval – is expected to be completed in the second half of 2023. Upon completion, Sohar International will be the surviving entity and acquire all HSBC Oman’s liabilities and assets.

The transaction is structured as an offering of Sohar International’s shares, valuing HSBC Oman at book value, with the option to receive the consideration in cash up to 70 per cent of the value.

As per Moody’s, capital buffers of the merged entity are expected to remain sound following the merger, supported by Sohar International’s capital issuances (US$414mn rights issue completed in September 2022) and sound profitability.

However, Moody’s expects Sohar International’s capital buffers to decline in the scenario of HSBC Oman’s shareholders opting for mostly cash payment at the time of the transaction settlement.

‘Profitability will remain supported by Sohar International’s strong corporate franchise following the merger (with 18 per cent estimated market share by assets) as well as by retail diversification from HSBC Oman,’ Moody’s said.

It said the deposit base of the merged entity will remain concentrated, although liquidity buffers are expected to increase at Sohar International after consolidation, and to remain adequate for the entity’s market funding reliance.

Moody’s also noted that although Sohar International will face integration challenges following the merger, and that synergies may therefore take some time to emerge, this is not expected to put downward pressure on the bank’s ratings.