Fitch affirms Oman's Bank Dhofar at 'BBB+'/'F2'; Outlook Stable

Bank Dhofar's IDRs and Support rating reflect the high probability of support from the Omani authorities, should the need arise. This view is based on the bank's systemic importance and the Central Bank of Oman's (CBO) strong history of support. The Individual rating reflects the bank's strengthened franchise and consistent performance. These factors are balanced by its tight liquidity and Tier 1 capital ratios, loan and deposit concentrations, and the lack of critical size compared to regional peers. It also takes into account risks inherent in the domestic economy.

"Our main concerns are the bank's high loan/deposit ratio and the decline in its Tier 1 ratio, which are showing signs of strain after recent fast growth," says Mahin Dissanayake, Associate Director in Fitch's Financial Institution Team. "Fitch believes that the bank is addressing both issues and, in particular, we view Bank Dhofar's recent announcement of OMR70m rights issue positively."

Bank Dhofar reported strong results in H108, with net profit up 63% yoy at OMR14.7m on rising loan volumes and a high net interest margin. Positively, non-interest income is also trending up, supported by the bank's increased focus on fee-based income and investment gains. The bank's efficiency indicators are satisfactory. Overall, its asset quality is sound, with a fall in its non-performing loan (NPL) ratio to 2.7% at end-07(from 4.3% at end-06) due to recoveries and write-offs. However, the agency also highlights the risks associated with Bank Dhofar's rapid loan growth in recent years and the effect of rising domestic inflation on future asset quality; these are also systemic issues.

Fitch believes the bank also deserves credit for strengthening its franchise in the last 18 months. Operations have been streamlined, more products have been introduced and experienced staff, including a new CEO, has been hired. "These initiatives are key to building a defensible franchise in this market, and the bank's recent strong results are partly a testament to this," says Mr Dissanayake.

Bank Dhofar started operations in 1990 by acquiring the Muscat branch of Banque Paribas. Following a series of mergers, the bank has grown to be the fourth largest in Oman. Listed on the Muscat Securities Market, its main shareholders are the Dhofar International Development & Investment Holding Company with a 30% stake and a group of seven government pension funds with 29%. The bank provides retail and corporate banking and treasury. Bank Dhofar is now expanding into project finance, loan syndications and investment banking.