Bank Dhofar's ratings affirmed

Tightening liquidity and BD's small balance sheet size (in the regional context) are constraining factors. BD's Long-Term and Short-Term Foreign Currency Ratings are affirmed at 'BBB+' and 'A2' respectively, with a Support Rating of '3'.

The ratings reflect the high likelihood of support from the government and the Bank's good financials. The 'Stable' Outlook for all the ratings is maintained.

BD's asset quality ratios, which have been strong for many years, strengthened further in recent periods reflecting good recoveries, aggressive write-offs and low non-performing loan (NPL) accretions.

The favourable economic climate in the country and BD's improved risk management practices have contributed to the Bank's strong and improving ratios. NPLs are now at a very low level and continue to be more than fully provided. There is one negative observation - loans with long-term maturities rose substantially last year and account for a large portion of the credit book raising both liquidity and credit risks overall.

The Bank is well capitalised owing to good profit retention rates. BD's shareholders have demonstrated support by subscribing to consecutive subordinated debt issues over the last two years. Its capital is unimpaired. Liquidity ratios tightened at end 2012 but are still at acceptable levels. The Bank relies mainly on customer deposits to fund its balance sheet with capital and subordinated debt providing additional support. The customer deposit growth rate slowed in 2012 after rising briskly in 2011, but this was mainly because the time deposit growth rate was reined in. BD continues to increase its low-cost deposit base, which nevertheless remains low as a proportion of total customer deposits compared to many of its peers. Maturity mismatches have widened due to the substantial increase in long-term loans - but the Bank is also raising its long-term liabilities base.

Profitability ratios are good overall, although some key ratios have weakened over the years. In particular, the operating profit to average total assets ratio has fallen due to narrowing margins - the declining trend was also seen in the peer group average. A fall in the maximum interest rate that banks can charge on personal loans (this is controlled by the central bank) and declining spreads on corporate loans due to competitive pressures, along with increased interest costs due to higher levels of subordinated debt have all contributed to BD's falling margins. Rising operating costs, reflecting higher investments in the banking infrastructure and increased headcount, have also eroded the Bank's ROAA in recent years. However, earnings remain strong overall.

The Bank commenced operations in January 1990 and is 28% owned by an investment company, the Dhofar International Development and Investment Holding Company (DIDIC). BD is a full-scale commercial bank offering a wide variety of retail and corporate banking services. Retail banking activities make a significant contribution to the Bank's operating profit, but income from corporate banking activities is also substantial. The Bank's principal business groups are Wholesale Banking, Consumer Banking, and Treasury.