BMI Bank outlook revised to negative on weakening asset quality and financial performance; 'BBB-/A-3' ratings affirmed

"The outlook revision reflects our view that the deterioration in the bank's operating environment is weakening BMI Bank's asset quality and bottom-line profitability," said Standard & Poor's credit analyst Goeksenin Karagoez.

In addition, it is making it more difficult for the bank to demonstrate that its business model can deliver a sustainable financial performance and achieve its strategic goals.

The ratings on BMI Bank reflect its small customer franchise and limited track record, deteriorated asset quality and financial performance, and weak funding and liquidity profile. These negative factors are somewhat balanced by its ownership structure and strong capitalization. BMI is 49% owned and controlled by BankMuscat S.A.O.G. (BBB+/Stable/A-2), which is itself ultimately controlled by the Sultanate of Oman (A/Stable/A-1). We consider that BMI's part ownership by, increasing cooperation with, and strategic importance to BankMuscat mean that strong support would be highly likely in case of need. The good track record of support, including a $250m capital injection in early 2008 and liquidity support, also underpins our opinion. BMI Bank's long-term rating is therefore two notches above the bank's stand-alone credit profile.

"The negative outlook reflects our opinion that the bank will find it difficult to counteract weakening asset quality and profitability in the near term," said Mr. Karagoez.

Strong capitalization and commitment from BankMuscat are important mitigating rating factors. However, we are concerned about the difficulties that the more difficult operating environment poses to the bank's strategy. We could lower the ratings on the bank if its asset quality continues to deteriorate and reaches a level exceeding its loss absorption capacity or if its liquidity position deteriorates significantly. Although not likely, a weakening of the links with BankMuscat would also lead to a downgrade.

The likelihood of a positive rating action in the foreseeable future appears limited. We could revise the outlook to stable if the bank can significantly improve its asset quality and demonstrate that it can achieve a satisfactory and sustainable financial performance.