Fitch downgrades Bank Muscat's Individual to 'C'; affirms Long-term IDR at 'A-'

At the same time, Fitch affirms BM's Long-term Issuer Default rating (IDR) at 'A-'(A minus) with a Stable Outlook, Short-term IDR at 'F2', Support rating at '1' and Support Rating Floor at 'A-'(A minus).

The downgrade of BM's Individual rating reflects Fitch's concerns about erosion of the bank's capital ratios resulting from rapid loan growth, potential systemic risks posed by retail lending in Oman, where BM has a large exposure, and the bank's tightening liquidity in worsening market conditions. The Individual rating also reflects its leading domestic franchise and sound performance and asset quality.

BM's IDRs and Support ratings reflect Fitch's view that there is an extremely high probability that the bank would receive support from the Omani authorities, if required. This is based on the Omani authorities' strong history of providing support to local banks, BM's importance to the Omani banking system and its 25% ownership by the Royal Court Affairs, an Omani government agency.

BM's operating profits rose a robust 46% in H108 yoy, benefiting from rapid recent loan growth (H108: 19%) with slightly lower but sound margins, healthy growth in fee income, adequate cost efficiency (H108: cost/income ratio 37%) and moderate impairment charges. Asset quality is strong; end-H108 impaired loans were 1.4% of gross loans with good reserves coverage of 203%. These ratios are flattered by rapid loan growth which may lead to weakened asset quality through the cycle. Retail loans constituted 40% of gross loans at end-H108, where Fitch is concerned by the high debt service ratios of up to 65% available in an increasingly inflationary environment and in the absence of a credit bureau; most Omani banks are also exposed to these risks but Fitch is concerned that these may lead to systemic problems in the medium term. Market risks appear moderate.

Liquidity is tight, given rapid loan growth with longer tenors and growth in short term wholesale funding, where market conditions have worsened. Wholesale funding sources include interbank funding, which grew to 23% of end-H108 total liabilities (end-2007: 20%, end-2006: 14%), an EMTN programme and subordinated debt. Liquidity is supported by substantial cash, interbank placements and government securities, which totalled 27% of end-H108 assets. Funding is mainly from customer deposits (65% of end-H108 total liabilities). Customer deposits are concentrated, but include some large, stable, public sector deposits.

Capital ratios were maintained at adequate levels following a Q407 OMR283m capital injection from the placement of new shares with Dubai Financial Group. However, BM's capital ratios have declined and remain under pressure from rapid loan growth. BM's Tier 1 ratio was an adequate 10.3% at end-H108 (end-2007: 12.6%).

Established in 1982, BM is the largest bank in Oman. At end-H108, it held around 41% of Omani banking system assets. It offers a range of commercial and retail banking services and operates through the largest local network of 115 branches and 290 ATMs, a Riyadh branch and affiliates in Bahrain, India and Pakistan.