Moody's Investors Service has downgraded the Financial Strength Rating (FSR) of Oman International Bank (OIB) to D from D+, leaving a stable outlook. The long- and short-term foreign currency deposit ratings for OIB remain unchanged at Baa3/Prime-3, one notch lower than the Baa2/Prime-2 country ceiling, imputing a high level of external support from the authorities, indicative of the bank's importance in the domestic market.
The downgrade reflects Moody's continuing concerns over corporate governance issues at OIB despite some positive initiatives, and over the weakening financial fundamentals of the bank, reflecting an asset quality deterioration and reduced profitability.
Moody's understands that the Board of Directors has approved the recommendations of external consultants for the design and implementation of a corporate governance structure, clearly defining the roles and responsibilities of shareholders, directors and management.
According to management, the implementation began in November 2001, with significant progress achieved so far. Although Moody's views this development as very positive, what is of utmost importance is that the corporate governance policies should be fully adhered to in practice. This will be difficult to achieve—and to assess—until a full management team has been in place for some time.
Moody's considers that at present, the distinction between ownership and management is not clear and that, furthermore, board interference is the main reason for the senior management vacuum currently prevailing at the bank. Specifically, OIB has been without a Chief Executive Officer since July 2001, when the board terminated the employment of the last CEO after he had fulfilled only eighteen months of a three-year contract. The bank's General Manager subsequently became Acting CEO, until early this year when he also left the bank.
The blurring between the roles of the ownership and management is of particular concern, given the high level of related-party exposures, says Moody's. Recent years have shown high volatility in the level of related-party exposure, mainly explained by the financial conditions of the business activities of the related parties. Despite falling during the year, credit exposure to related parties, including non-funded exposures, still represented 39 percent of shareholders' funds in December 2001.
In addition, the bank has experienced significant asset quality deterioration during recent years, reflecting both the problems experienced by its overseas operations, most particularly in India, and the systemic asset quality deterioration in the domestic banking system. Moody's welcomes management's efforts to address the asset quality problems by reducing exposure to or exiting from some of the classified accounts, and by establishing a separate risk management unit to better control and monitor credit risk exposures.
Moody's noted that a declining trend in non-interest income revenues and a significant increase in loan loss provisioning expense requirements during recent years have taken their toll on OIB's profitability. As a result, the bank's return on average assets dropped to 0.3 percent in 2001, down from 1.9 percent in 1998.
While Moody's recognizes that the bank's board and management are taking steps to address these concerns, progress to date is slow and the bank's current financial strength is commensurate with a D rating. Headquartered in Muscat, Oman, OIB had total assets of 672 million Omani riyals ($1.749 billion) as of December 2001. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
