Muscat – Fitch Ratings revised Ahlibank’s outlook from “stable” to “negative” and affirmed the bank’s long-term issuer default rating at “B+”. Fitch 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 also revised its outlook on Oman’s operating environment score from stable to negative.
“The revised outlook reflects our view that the pressures on the operating environment from the pandemic and lower oil prices have eased sufficiently, and that the bank’s financial metrics have held up over the past few quarters, despite these pressures,” Fitch said.
Fitch has removed ahlibank’s supporting rating and supporting 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 accordance with updated criteria, we have given ahlibank a government support rating of ‘b’.
Ahlibank’s issuer default ratings are determined by the viability rating. “ahlibank’s viability rating reflects its more limited franchise than its peers”, with a smaller but growing branch network, lower capitalization and funding profile than its peers”, and high concentrations of both sides of its balance sheet, exposing the bank to event risk,” the rating agency said.
Ahlibank’s loan quality has remained stable to date, despite pressure from the operating environment in recent years, although it has declined in 2021. Stage 3 loans under IFRS 9 increased slightly to 3 .2% of gross loans at the end of 2021, compared to 2.9% at the end of 2020, the lowest among banks rated by Fitch.
Phase 2 loans represented 19% of gross loans at the end of 2021, unchanged from the end of 2020. “This is high by global comparison, but in line with national peers”, reflecting the conservative classification policies of Omani banks. Our asset quality assessment also factors in ahlibank’s strong loan growth and sector concentrations, including in the more volatile construction and real estate sector,” the rating agency added.
“We also factor in ahlibank’s specific coverage of impaired loans at 59% at end-2021, which is at the lower end of the peer range, reflecting the bank’s reliance on collateral, while that the coverage of impaired loans by total reserves was a reasonable 98 percent,” Fitch said.
According to Fitch, ahlibank’s profitability is structurally weaker than that of its peers, due to the bank’s greater dependence on term deposits, which leads to a higher cost of funding (3.2%) and therefore a lower net interest margin (2.4%) in 2021.
In 2021, ahlibank’s operating profit/risk-weighted assets increased to 1.3% from 1.1% in 2020. This is explained by the lower cost of risk, thanks to the stabilization of the economic environment and business growth of 10% per year. year-over-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, loan and securities impairment charges were 31% of pre-impairment operating income, up from 35% in 2020, but still higher than pre-pandemic levels.
“Following larger buffers against minimum requirements, we have upgraded ahlibank’s capitalization and leverage score from ‘b+’ to ‘b’,” Fitch said.
“The bank’s total capital ratio of 17.31% at the end of 2021 (end of 2020: 15.7%) provides greater headroom above the current minimum regulatory requirements, boosted by the issuance of instruments Additional Tier 1s,” the agency explained.
Nevertheless, Fitch believes that the Omani authorities’ propensity to support ahlibank and the banking sector is high due to the high risk of contagion in the sector, the role the banking sector plays in financing the economy and the willingness authorities to preserve financial stability as the country implements its economic development plans.