Fitch affirms Oman's United Finance Company at 'BBB(omn)'; outlook stable

The National ratings reflect UFC's leading Omani leasing franchise, good margins and adequate asset quality and capitalisation.

They also reflect the company's tight liquidity, concentrated wholesale funding, modest size, rapid recent loan growth, risks inherent in the finance and leasing sector and its reliance on a relatively small and undiversified economy.

UFC's performance is satisfactory. Operating profits rose a robust 113% in H108 yoy, driven by rapid loan growth (H108: 34%, 2007: 67%) with good margins (H108: net interest margin 6.9%) and cost efficiency (H108: cost/ income ratio 27%), and moderate but rising loan impairment charges (H108: OMR0.4m).

Asset quality is adequate, with impaired loans 4.8% of end-H108 gross loans. Reserves coverage was also adequate at 69% at end-H108 and all loans are secured.

Reserves coverage was supported by an additional OMR1.5m special reserve in equity at end-Q308.

Fitch notes that potential asset quality problems may have been stored up during this loan growth and impaired loans are likely to rise further through the cycle.

Interest rate risks are moderate.

Fitch views UFC's liquidity as tight given its reliance on concentrated local and regional interbank funding (end-H108: 66% of non-equity funding, around a third of which is short-term), where the global credit crisis has resulted in somewhat weakened liquidity, as well as its rapid loan growth and modest liquid assets.

Liquidity is supported by some committed bank lines.

Its funding profile has improved with increasing customer deposits. Capitalisation as measured by the core capital/total assets ratio was adequate at 20.7% at end-H108.

A Q208 OMR5.9m rights issue has helped to maintain capital and leverage at adequate levels.

UFC is the leading finance and leasing company (FLC) in Oman with an estimated market share of 27% of Omani FLC assets at end-2007.

Around 70% of financing is extended to SMEs, with the balance to retail customers.

Its major shareholders are diversified Omani holding companies and prominent local businessmen; its shares are listed on the Muscat Securities Market and Bahrain Stock Exchange.