Bank Dhofar’s ratings affirmed

April 5, 2014 9:28 am

Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Bank Dhofar’s (BD) Financial Strength rating at ‘BBB+’ which continues to be underpinned by the Bank’s good loan asset quality, its sound and relatively stable capital adequacy ratio (CAR), as well as the improvement of its key liquidity ratios at end 2013. The rating is however constrained by the Bank’s declining operating profitability, the lower level of fee income compared to its peers and its relatively small balance sheet size.

BD’s Long-Term and Short-Term Foreign Currency Ratings are also affirmed at ‘BBB+’ and ‘A2’, respectively. The Support Rating is also maintained at ‘3’, reflecting the high likelihood of support from the government and the demonstrated support by the Bank’s shareholders. The Outlook for all the ratings remains ‘Stable’.

BD’s asset quality ratios, which have remained better than the peer group average, strengthened further in the period under review. The favourable economic climate in the country and improved risk management practices have contributed to the Bank’s strong and improving loan asset quality ratios. Loan growth picked up strongly in 2013, largely on account of higher lending to the corporate segment. On the other hand, personal loan growth, like the sector, remains constrained by the lending criteria introduced by the regulator. Corporate lending opportunities will continue to grow this year on the back of government spending on the infrastructure and petrochemical sectors. The continued lengthening of the loan portfolio, which gives rise to both credit and liquidity risks, is a negative factor.

The Bank’s key liquidity ratios eased to a fairly comfortable level at end 2013, to a large extent aided by government deposits. The customer deposit growth rate rebounded in 2013, together with a good improvement in the deposit mix. Nonetheless, the Bank’s funding costs, while declining marginally in 2013, remained higher than its peers. A number of key profitability ratios have also continued to weaken largely due to the further narrowing of margins, although this declining trend was in line with the sector. Compression of spreads on corporate loans due to competitive pressures and increased interest costs on account of higher levels of subordinated debt have all contributed to BD’s falling margins in recent years. Rising operating costs, reflecting higher investments in the banking infrastructure and increased headcount, have also eroded the Bank’s return on average assets (ROAA) over the past few years. The significant jump of the Bank’s ROAA to the highest among its peers in 2013 was largely due to the positive outcome of a pending legal case and consequently, this is unlikely to be maintained. That said, the Bank’s overall profitability ratios remained reasonably good.

In July last year, BD initiated a dialogue with Bank Sohar to consider the possibility of a merger to create the second largest bank in Oman. The main reasons for the proposed merger are the enhancement of the Bank’s ability to finance major economic projects and to increase competition for the international banks – which currently finance a large part of projects in the country. Early this year, the boards of both BD and Bank Sohar set up subcommittees to discuss ‘the way forward’, should a decision be taken to proceed with the proposed merger. At end-March, this project remained at its very initial stages of dialogue.

The Bank commenced operations as Bank Dhofar Al Omani Al Fransi (BDOF) in January 1990, after it purchased the assets and liabilities of Banque Paribas’ Muscat branch. Today, BD is a full-scale commercial bank offering a wide variety of retail and corporate banking services. At end 2013, BD remains the third largest bank in the country with assets totaling OMR2.6 billion ($6.7 billion).

Primary Analyst
Agnes Seah
Credit Analyst
Tel: 357 2534 2300