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Ahli Bank (Oman)’s ratings affirmed

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Oman-based Ahli Bank’s (AB) Financial Strength Rating (FSR) at ‘BBB’, underpinned by the Bank’s very sound and peer group best loan asset quality, the recent capital increase and good profitability at all levels. Constraining the FSR are the Bank’s customer deposit funding concentrations, tight liquidity metrics and modest asset size.

Given the level of ownership and management control by Ahli United Bank B.S.C. (AUB, Foreign Currency Long-Term Rating ‘A-‘), CI affirms the Bank’s Long and Short-Term Foreign Currency Ratings at ‘BBB+’ and ‘A2’, respectively. The Support Level is affirmed at ‘3’, underscoring the high likelihood of support from the Omani authorities and from AUB in case of need. 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 the five-year Technical and Management Services Agreement between AB and AUB. The Bank continues to successfully expand and diversify its business franchise in Oman, while gaining larger shares of the loan and customer deposit markets. Although non-performing loans (NPLs) grew in the first half of the current year, albeit from a very low base of comparison, AB’s loan asset quality remains very sound as demonstrated by the exceptionally low NPL to gross loans ratio and more than full loan-loss reserve (LLR) coverage. An increase in impaired loans over time is a normal result of new loans added. Having successfully diversified away from housing loans, the credit portfolio is now well balanced between corporate and personal lending, in line with the Bank’s strategic objectives.

AB’s liquidity has tightened markedly over the last four years due to consistent asset growth, and headline liquidity ratios remain weaker than other Omani banks. That said, AB’s effective liquidity depends on the unused borrowing capacity under committed lines of credit, and these remain considerable and represent an important liquidity risk mitigating factor. Customer deposits continued to expand strongly in 2013, led by savings as well as time deposits, although the latter contracted in H1 2014, while savings accounts continued to grow very briskly. The Omani market itself is characterised by excess OMR liquidity and OMR customer funds can be readily mobilised on the basis of price. Relatively expensive time deposits however still constitute a significant share of AB’s customer deposit base. This shortcoming is being addressed through expansion of the branch network and the recently launched Islamic windows, which are helping to gather cheaper savings and current deposits. Over time, the increased share of savings and demand balances is expected to improve customer deposit concentrations.

Despite the effect of a sharp drop in non-interest income in 2013 due to regulatory limits on retail lending, and the larger cost base associated with the conversion into a full-fledged commercial bank, AB’s profitability at both the net and operating levels remained good. This highlights strong gross income generation, notwithstanding the impact of a compressed net interest margin. AB’s sound profitability however has come at the cost of tighter than peer group liquidity metrics. In the near to medium-term, the Bank aims to rebuild fee income by focusing on ancillary business with corporate customers.

The Bank’s balance sheet is comfortably capitalised, and although the capital adequacy ratio (CAR) declined in 2013 (partly because of the implementation of Basel III), the subordinated debt issue recently completed is expected to produce a modest improvement in capital ratios.

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 owns 9.9% of shares. Since its successful transformation into a commercial bank, the Bank has increased its market share of asset and deposits in Oman. AB currently provides a wide range of products and services in corporate, retail, investment and private banking. With a network of 20 branches, AB’s total assets at end-June 2014 amounted to OMR1,517mn (USD3.99billion) and total capital was OMR187mn (USD493mn).