Moody's upgrades BankMuscat's (Oman) ratings

At the same time, Moody's has also upgraded the long- and short-term local currency debt ratings of BM to Baa1/P-2 from Baa3/P-3. These rating actions follow Moody's recent upgrade of Oman's foreign and local currency country ceiling for bonds and bank deposits to Baa1/P-2 from Baa2/P-2. The outlook for the local and foreign currency deposit and debt ratings is stable.

By the same action, Moody's has also changed the outlook on the D+ Financial Strength Rating (FSR) of BM from stable to positive.

The upgrading of the deposit ratings and the senior unsecured debt rating of BM is based on the strong likelihood of support from the Omani authorities, should the need arise, combined with the improved capacity of the government to provide such support, as a result of the significant improvement in Oman's economic fundamentals over the past several years. Moody's believes that BM is a very important institution for the domestic banking system, and that its possible failure would lead to a systemic crisis. For this reason its deposit ratings are placed at the ceiling for such deposits in Oman.

In the past, the Omani authorities have supported domestic banks in difficulty although there is no explicit guarantee to do so, and Moody's does not anticipate any change in that policy over the medium term. Nevertheless, any future upgrade of the rating ceiling for Omani bank deposits would not automatically result in a corresponding increase in any of the banks' ratings for deposits.

With respect to the local currency debt and deposit ratings, as well as senior unsecured debt ratings, Moody's notes that the respective ratings do not take into consideration Moody's Joint Default Analysis (JDA) methodology which has not yet been rolled out for deposit-taking institutions. According to the rating agency, the bank's prominent role as deposit-takers, both in the local and interbank market, together with various degrees of government ownership, and their relative importance for their national economy would probably imply a very high level of support, particularly in the case of the commercial banks. Consequently, higher ratings than those announced today could be envisaged for BM once JDA has been implemented for deposit-taking institutions.

The decision to change the outlook on BM's D+ FSR from stable to positive recognises the bank's substantially enhanced financial fundamentals over the past few years. Specific credit improvements include its growing recurring earning power, its improving asset quality underscored by declining levels of problem loans and rising loan loss reserves which more than fully cover non-performing loans, and moderately improved liquidity position.

An upgrade in BM's D+ FSR is likely to be heavily dependent on further improvements in the bank's liquidity position, as well as a continued trend of improving asset quality metrics. Further development in the domestic economic environment would also place upward pressure on the bank's FSR. At the same time, any significant deterioration in BM's financial fundamentals, particularly its asset quality, liquidity metrics or capital position, could lead to a lower FSR.

The ratings changes are as follows:

- BankMuscat: The long- and short-term foreign currency deposit ratings upgraded to Baa1/P-2 from Baa3/P-3. The long-term foreign currency senior unsecured rating upgraded to Baa1 from Baa3. The long- and short-term local currency senior debt ratings upgraded to Baa1/P-2 from Baa3/P-3. The outlook on the D+ financial strength rating changed from stable to positive.

At the end of June 2005, BankMuscat had total assets of OMR1.815 billion (USD4.721 billion. BM is headquartered in Muscat, Oman.