Ahli Bank (Oman) ratings affirmed

These ratings reflect the level of ownership and management control by Ahli United Bank (AUB, rated 'A-'), the high likelihood of support from the Omani authorities in case of need, and AB's overall sound risk profile. The Financial Strength Rating (FSR) is maintained at 'BBB' supported by the Bank's sound asset quality, recent capital injection and further increase in profitability. Factors constraining the FSR are asset size, funding concentrations and tight liquidity. The Support level is affirmed at '3' and the Outlook for the ratings remains 'Stable'.

AB is a well managed institution following a prudent credit policy and executing a clear business strategy. Risk management and systems benefit from the expertise provided by AUB, the largest shareholder, under a management contract between AB and AUB. Although non-performing loans (NPLs) continued to grow into the current year, albeit from a very low base of comparison, AB's loan quality remains sound, as demonstrated by the low NPL to gross loans ratio and more than full loan-loss reserve coverage. It should be noted that an increase in impaired loans over time is a normal result of new loans added. While there remains significant exposure to housing loans (a legacy of its former business model) the concentration has improved with diversification into consumer and corporate lending. Demand for housing remains strong in the Omani market while the real estate sector in general is not exposed to the excesses seen in some other GCC markets.

Despite a larger cost base associated with the conversion into a full-fledged commercial bank, AB's net profit and operating profit continued to grow noticeably on the back of higher net interest and non-interest income. Customer deposits expanded strongly, although time deposits still dominated the customer deposit base. This shortcoming is being addressed through expansion of the branch network, which is helping to gather cheaper savings deposits and improve deposit concentrations. Liquidity has tightened in recent years due to credit expansion but stabilised in H2 2012. Mitigating AB's tight liquidity are alternative sources of funding including standby committed credit facilities from other GCC banks. It should be noted that in view of ample liquidity in the market the Bank is consciously running a rather tight liquidity position. An oversubscribed rights issue in July 2012 reinforced an already sound capital base with the proceeds earmarked to finance ongoing business expansion.

AB was established in May 1997 as Alliance Housing Bank, Oman's first private sector housing bank. Its ownership changed in late 2007 after Bahrain-based AUB took a 35% stake. The International Finance Corporation (IFC) owns 9.9% of shares. AUB provides management and technical expertise under a 5-year renewable management contract. Since its transformation into a commercial bank several years ago, the Bank has increased its market share of asset and deposits. AB currently provides a wide range of products and services in corporate, retail, investment and private banking. With a network of eleven branches, AB's total assets at end-June 2012 amounted to OR1,052m ($2.7bn) and total capital was OR172m ($448m).