Rating drivers and sensitivities - IDRs, support rating and support rating floor
BM's IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support from the Omani authorities in case of need, given the government's strong supportive stance towards the domestic system, the government's substantial stake in BM and the bank's systemic importance as the by far largest bank in Oman.
Being driven by support, the bank's IDRs are sensitive to changes in Fitch's perception of the willingness or ability of the state of Oman to support BM.
Rating drivers and sensitivities - VR
The VR reflects BM's strong franchise, which translates into leading market shares in Oman. Given its size and ownership structure, BM benefits from preferential access to government-sponsored business and funding.
BM's profitability improved in H112 yoy, driven by volume growth outpacing contracting asset spreads. Fitch expects the bank's financial performance to continue to benefit from the growing Omani economy and its strong position domestically.
BM's headline asset quality figures continued their improving trend in H112. Credit quality in Oman generally benefits from rising government spending, and government initiatives to create employment. As is typical for the region, asset quality and in turn capitalisation remain highly vulnerable to event risk given high concentrations in the loan book. Non-performing loans (NPLs) continue to be fully reserved.
Although concentrated, BM's funding profile benefits from its strong deposit franchise, which is built around a high proportion of sticky retail and government/quasi-government deposits. Given constraints to source longer-term wholesale funding, maturity mismatches could increase markedly and consequently put pressure on liquidity and BM's VR.
With a Fitch core capital ratio of 12.6% at end-H112, Fitch believes BM is modestly capitalised. In light of anticipated continuously strong credit growth and in order to set up the Islamic banking window, the bank announced a rights issue, which will boost Tier 1 capital by OMR97m and that should improve the bank's Fitch core capital ratio by around 150bp based on end-H112 risk weighted assets. However, if credit growth continues at its currently high level, combined with historical level of high pay-out ratios, the capital benefit of the rights issue will not maintain the Fitch core capital ratio at its current level. As Fitch regards BM as only modestly capitalised, any more negative trends than Fitch's base case assumptions could put pressure on Fitch's assessment of the bank's standalone strength.
The rating actions are as follows:
Long-term IDR affirmed at 'A-', Outlook Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Senior unsecured notes affirmed at 'A-'
Senior unsecured - EMTN programme affirmed at 'A-'
Senior unsecured - EMTN programme affirmed at 'F2'.