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',” said a media statement. “Bank Sohar's IDRs, Support Rating and Support Rating Floor reflect Fitch's view of the high probability of support being available from the Omani authorities if needed, given the strong history of support for the banking system from the regulator, the Central Bank of Oman (CBO).
“These ratings are sensitive to a change in Fitch's view of the probability of support from the Omani state.
“Bank Sohar's VR is mainly constrained at 'bb' by the bank's relatively weak capitalisation. The VR reflects Bank Sohar's fairly small but growing franchise, its short track record (incorporated in 2007), and high loan and deposit concentrations (although these are in line with the bank's peers and this is an issue for most banks in the region). The VR also takes into account the bank's strengthening profitability due to the successful deployment of its strategy, and its capable and experienced management.
Bank Sohar continued to report solid growth in earnings and profitability in 2012 and Q113, with net income rising by 58 per cent and 15 per cent, respectively, year-on-year. Net interest income saw a strong 19 per cent growth in 2012 due to higher loan volumes and a reduction in Sohar's cost of funding as the bank improved its balance sheet management. Impairment charges reduced significantly in 2012, and absorbed only 9 per cent of pre-impairment operating profit (and 6 per cent in Q113), down from 18 per cent a year earlier, as the bank's impaired loan level stabilised.
“Asset quality is sound and compares favourably with peers. Bank Sohar consistently shows one of the lowest NPL ratios among peers (stability of asset quality is a focus for the bank), and strong reserve coverage. Impaired loans amounted to OMR18.5m at end-Q113, about 1.6 per cent of the loan book. Impaired lending was mainly in the real estate and personal segments. Loan reserve coverage remained strong at 140 per cent at end-Q113.
“Customer deposits continued to rise, by 14 per cent in 2012, almost matching loan growth. Growth was split fairly evenly between corporate and retail; at end-Q113 about 17 per cent of total deposits were retail. There is very high deposit concentration, but on the positive side, the larger deposits are mostly sourced from the government and the public sector and tend to be stable despite having relatively short maturities. This mitigates liquidity risk to some extent.
“Bank Sohar's Fitch core capital ratio was 9.8 per cent at end-Q113, similar to its Tier 1 ratio (both unchanged from end-2012). In Fitch's view, the relatively low capitalisation is a key constraint on the bank's VR and a potential reason for a downgrade if it should fall much further. Although the bank has no immediate plans to raise new capital, neither does it have any plans to resume its rapid expansion. Cash dividends for 2012 were relatively low at 17 per cent of 2012 net income, down from 55 per cent in 2011. If dividends remain low, it should help boost capitalisation.”