Moody's assigns A3/Prime-2/D+ ratings to Bank Dhofar (Oman)

The outlooks on all ratings are stable.

Bank Dhofar's D+ BFSR is supported by its good franchise as the country's fourth-largest commercial bank in terms of banking assets. A series of successfully executed acquisitions during the past 17 years and a record of smoothly integrating the acquired banks have allowed BD to build a good banking franchise in Oman, resulting in increased profitability and
good revenue-generating capability. The bank enjoys strong profitability levels underscored by healthy interest rate margins and a low cost base that underpin its BFSR, while its adequate capital position is an additional factor supporting its rating.

At the same time, the BFSR also takes into account the bank's high dependency on the highly concentrated Omani operating environment that is vulnerable to periodic swings in energy prices, as well as the need to further strengthen its risk management and corporate governance culture. The small size of the Omani economy and its dependence on oil, gas and state spending constrain the ratings of all the Omani banks.

Further limiting BD's BFSR is its liquidity position that remains somewhat less favourable than that of its Omani peers. In its effort to
support business growth and reduce balance sheet mismatches, the bank has been relying heavily on capital market funding, making three forays into
the syndicated market during the past three years. We note that although such funds on one hand contribute to the diversification of the bank's funding sources and the lengthening of its maturity profile, on the other hand they tend to be a more volatile and price- and confidence-sensitive source of funds than customer deposits. Moody's believes that the bank's relatively low levels of core liquid assets, combined with its sizeable funding concentrations represent significant risks associated with its funding profile.

Although improving, BD's asset quality remains weak compared to higher-rated Omani peers and acts as a constraint to its BFSR. The deterioration in the quality of its loan book was related mainly to the sharp increase in system-wide NPLs several years ago, and also to a large stock of legacy problem loans inherited through the absorption of several acquired banks, whose loan books were generally of poorer quality than BD's own. Hence, BD introduced tighter underwriting standards and enhanced loan monitoring procedures, resulting in improving asset quality metrics. The strong and booming operating environment in Oman was an
additional factor contributing to this improvement.

Bank Dhofar is headquartered in Muscat, Oman, and reported total assets of OMR751million (US$1,947 million) at 31 March 2007.