Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Bank Sohar S.A.O.G’s Financial Strength Rating (FSR) at ‘BBB’ which is underpinned by the Bank’s good asset quality, strong internal capital generation and sustained good growth of both operating and net profit over the past few years and in Q1 2014. The Bank’s rating is however constrained by the low total capital to total assets ratio compared to its peers, the high level of interbank borrowings, concentrations in its deposit base and the below peer group average operating and net profitability. The Bank’s overall financial profile nonetheless remains sound, and together with the positive economic prospects for Oman, Bank Sohar’s Foreign Currency Ratings are affirmed at ‘BBB+’ Long-Term and ‘A3’ Short-Term. The Support Rating is maintained at ‘2’ in view of the sizeable combined ownership of the government and reflects the high likelihood of support in case of need. The Outlook for all the ratings is ‘Stable’.
Bank Sohar has built up its balance sheet and market share since its inception in 2007 to rank fourth in terms of assets in just three years. This position was maintained at end 2013 and Q1 2014. The Bank continued to possess good loan asset quality, characterised by its low non-performing loan (NPL) ratio and a more than full loan loss reserve (LLR) coverage position. A significant slowdown of customer deposit expansion in 2013 has however tightened loan based liquidity ratios. While remaining slightly better than the peer group average in 2013, these loan-based ratios were a little tight at end Q1 2014, as with the sector. Liquid asset holdings and quasi liquid asset ratios on the other hand remained at comfortable levels, but the Bank’s net liquid asset ratio has fallen to below the peer group average with the increased usage of interbank borrowings; this ratio declined further at end Q1 2014. The higher usage of interbank borrowings was nonetheless a part of its strategy to lower the cost of funds. As with its peers, the Bank’s primary source of funds remains its customer deposits; the high customer concentration in this deposit base was in common with the industry, although partly mitigated by the fact that these customers are related to the Omani government (quasi-government companies and pension funds).
A negative impact of the steady loan expansion over the years was the decline in the capital adequacy ratio (CAR). The Bank’s total capital to total assets ratio has also fallen to the lowest in CI’s peer group. While CAR stood at a satisfactory level at end Q1 2014, it could nonetheless constrain loan growth going forward. However, the Bank has a strong internal capital generation rate supported by the sustained good growth of earnings and a modest dividend payout ratio.
On the earnings side, key profitability parameters – except for net profitability – have weakened marginally, although the decline was in line with the trend for the sector, reflecting the persistently low interest rate environment and the high competition in what is a relatively small market. While the Bank was able to lower funding costs and increase non-interest income (NII) to combat some of the compression of interest margin, both its operating and net profitability ratios remained below the peer group average. That said, the gap is narrowing fast.
Bank Sohar was established in 2007 by a group of investors led by The Royal Court Affairs (RCA), a government body. The RCA is the single largest shareholder with a nearly 15% stake; the government, through the RCA, Oman’s sovereign wealth fund and various pension funds, together own more than 40% of the Bank. No single shareholder or group exercises management control. The Bank’s shares are listed on the local stock exchange. At end Q1 2014, the Bank had total assets of OMR2.0bn ($5.3bn) and an equity base of OMR0.2bn ($0.5bn). The Bank also reported a significant 33.3% year-on-year growth in net profit to OMR8.0m ($21.1m) in the first three months of this year.
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