Fitch Ratings has upgraded Bank Muscat SAOG's (BM) Long-Term Issuer Default Ratings (IDRs) to 'BB' from 'BB-' and HSBC Bank Oman SAOG's (HBON) Long-Term IDRs to 'BB+' from 'BB'.

The Outlooks are Stable. Fitch has also upgraded BM's Viability Rating (VR) to 'bb' from 'bb-' and its Government Support Rating (GSR) to 'bb-' from 'b+'. HBON's Shareholder Support Rating (SSR) has been upgraded to 'bb+' from 'bb' and its VR affirmed at 'bb-'. The Stable Outlook on HBON's Long-Term IDR mirrors that on the Omani sovereign rating.

Fitch has also affirmed the Long-Term IDRs and VRs of National Bank of Oman SAOG (NBO), Bank Dhofar SAOG (BD), Sohar International Bank SAOG (SIB), and Ahli Bank SAOG (ABO). The affirmation of the VRs reflects our view that the improved operating environment in Oman does not have a sufficient impact on the banks' intrinsic credit profile to warrant an upgrade. This considers weaknesses in asset quality and profitability metrics that are still lagging BM's.

The six banks' Short-Term IDRs have been affirmed at 'B'. A full list of rating actions is at the end of this rating action commentary.

The rating actions follow the upgrade of the Omani sovereign (see 'Fitch Upgrades Oman to 'BB; Outlook Stable' dated 15 August 2022 on www.fitchratings.com) and our subsequent reassessment of the GSR for domestic systemically important banks (D-SIB) in Oman to 'b+' from 'b', reflecting a stronger ability of the Omani authorities to support the local banking system. Fitch has also revised its assessment of the Omani banks' operating environment score to 'bb' from 'bb-', signalling improvements in operating conditions in the context of higher oil prices, which will drive credit demand and ease pressures on banks' financial profiles.

The upgrade of Oman reflected significant improvements in the country's fiscal metrics, lessening of external financing pressures and ongoing efforts to reform public finances.

Key Rating Drivers

IDRS and VRs

Unless stated, the banks' Key Rating Drivers are as stated in the previous rating action commentaries (RACs): see 'Fitch Revises Bank Muscat's Outlook to Stable; Affirms at 'BB-'; 'Fitch Revises Bank Dhofar's Outlook to Stable; Affirms at 'BB-'; 'Fitch Revises National Bank of Oman's Outlook to Stable; Affirms at 'BB-', dated 13 January 2022; 'Fitch Revises Outlook on HSBC Bank Oman to Stable; Affirms at 'BB', dated 21 February 2022; 'Fitch Revises Outlook on Sohar International Bank to Stable; Affirms at 'B+' and Fitch Revises Ahli Bank SAOG's Outlook to Stable; Affirms at 'B+' dated 22 February 2022.

BM

BM's Long-Term IDRs are driven by its VR. The bank's VR reflects its dominant position in Oman with significant market shares across retail and commercial banking (about 35% market share). BM benefits from its flagship status and close links to the government, which gives it access to high quality borrowers and funding from the government and its related entities (GREs). The VR also considers the bank's resilient asset quality, sound profitability and capitalisation, as well as stable funding and good liquidity.

BM's VR is capped by the Omani operating environment. This reflects Fitch's view that BM's credit profile is closely correlated with the sovereign due to the bank's domestically-focused business model, including large exposures to the sovereign through holdings of government securities, financing to civil servants, high reliance on government spending to drive credit growth, as well as a large proportion of government and GRE deposits.

BM's senior unsecured EMTN programme and debt ratings are rated in line with its IDRs and are therefore driven by the same factors that drive its IDRs.

HBON

HBON's IDRs and SSR are driven by Fitch's expectation of a moderate probability of support available to the bank from its ultimate parent, HSBC Holdings plc (HSBC; A+/Negative). This reflects HSBC's strong ability to support HBON, and HBON's small size relative to the group. This view is supported by HBON's role in the group, providing products and services in a market identified as important to HSBC in the Middle East. Our view of support also factors in strong integration (including management, systems and risk practices), common branding and the high reputational risk that an HBON default would mean for HSBC.

HBON's Long-Term IDR is capped by Oman's Country Ceiling of 'BB+', reflecting our view of country risks related to the banking sector in Oman. We previously stated that HBON's Long-Term IDR could be upgraded to the Country Ceiling level should Oman's external finances improve in a way that we deem sustainable.

HBON's VR reflects the bank's adequate franchise and business model benefiting from its links with HSBC, conservative risk profile, resilient asset quality, sound capitalisation, stable funding and adequate liquidity. It also reflects profitability that is lower than larger peers.

BD

BD's IDRs are driven by its VR. The VR reflects its strong franchise as well as reasonable capitalisation and funding. BD is the second-largest bank in Oman, supported by a large domestic branch network and a longstanding presence in retail banking. Its business model, although split between retail, corporate and government customers, is still highly dependent on government spending, resulting in high single-obligor and sector concentrations on both sides of the balance sheet.

NBO

NBO's IDRs are driven by its VR. The bank's VR reflects NBO's strong franchise and well-balanced business model, as well as reasonable capitalisation and funding. NBO is the third-largest bank in Oman, supported by a large retail branch network, which aids its deposit-collection ability. NBO's business model is well-balanced with its loan book evenly split between retail and corporate banking. Nonetheless, the bank's domestic focus and the narrow Omani economy create a heavy reliance on government spending, the main driver of credit growth in Oman, and result in high concentrations on both sides of the balance sheet.

SIB

SIB's Long-Term IDR is driven by its VR and is underpinned by potential support from the Omani authorities. The bank's VR reflects its sound market shares, particularly in corporate banking, and strong government links, with the latter adding to its business flows and supporting its deposit-gathering ability. It also reflects a more concentrated business model compared with some peer banks, single name and sector concentrations exposing the bank to event risk, and only moderate capital buffers.

SIB has started the process to merge with Oman-based Bank Nizwa with due diligence ongoing. SIB also announced in July 2022 that is has signed a memorandum of understanding with HBON to enter exclusive discussions over a potential merger. The negotiations will be on the basis of a merger by incorporation, under which HBON would be dissolved and its shareholders would be offered a consideration valuing the bank at 1x book value. We expect SIB's intrinsic credit profile to benefit from the merger, should it materialise, in particular the bank's business profile and asset quality.

ABO

ABO's Long-Term IDR is driven by its VR and is underpinned by potential support from the Omani authorities. ABO's VR reflects its more limited franchise than peers, with a smaller albeit growing branch network, weaker capitalisation and funding profile than peers, and high concentrations on both sides of its balance sheet, exposing the bank to event risk.

GSR

The sovereign's ability to support the banking system has moderately improved, as reflected by its recent upgrade, but remains limited, in Fitch's view. The sovereign's net foreign assets remain negative and are expected to turn marginally positive in 2022, after deteriorating dramatically to -9% of GDP in 2020 from 53% in 2014. In addition, medium-term funding requirements remain sizeable and Oman's level of external indebtedness is high. We forecast gross external debt/GDP at 92% in 2022, compared with a 'BB' median of 55%. This reduces the sovereign's financial flexibility to provide support to its local banks.

Nonetheless, Fitch believes the Omani authorities' propensity to support the banking sector is high because of high contagion risk in the sector, the role the banking sector plays in financing the economy and the authorities' drive to preserve financial stability as the country implements its economic development plans.

BD, NBO, SIB, ABO

Fitch considers these four banks to be D-SIBs and their GSRs are therefore in line with the Omani D-SIB GSR of 'b+'.

BM

Given its flagship status in Oman, BM's GSR is one notch above the Omani D-SIB GSR of 'b+'.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Unless stated, the negative sensitivities are as outlined in the RACs referenced above.

BM

IDRs

A downgrade of the sovereign rating and in turn the operating environment score would lead to a downgrade of BM's VR and therefore its Long-Term IDR. This is not our base case given the recent upgrade of the sovereign rating.

The senior unsecured EMTN programme and debt ratings are rated in line with the bank's IDRs and are therefore subject to the same sensitivities.

GSR

BM's GSR is sensitive to a negative change in Fitch's view of the creditworthiness of the Omani authorities or on their propensity to support the banking system or the bank. This is not currently anticipated given the recent upgrade of the Omani sovereign rating.

HBON

IDRs

HBON's Long-Term IDR and SSR are sensitive to a negative change in Fitch's view of HSBC's ability or propensity to provide support, a downgrade of the Omani sovereign and a negative change of Fitch's view of risk of intervention risk the Omani banking sector.

A downgrade of the sovereign rating would likely lead to a downgrade of HBON's IDRs. This is unlikely given the recent upgrade.

ABO, SIB, BD, NBO

IDRS, GSRs

Given that ABO's and SIB's VR and GSR are at the same level, a downgrade of these banks' Long-Term IDRs would result from a downgrade of their GSRs and a downgrade of their VRs. ABO's and SIB's GSR are sensitive to a negative change in Fitch's view of the creditworthiness of the Omani authorities and on their propensity to support the banking system or the banks.

BD's and NBO's IDRs are sensitive to a downgrade of their VRs. BD's and NBO's GSR are sensitive to a negative change in Fitch's view of the creditworthiness of the Omani authorities and on their propensity to support the banking system or the bank.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BM

IDRs, VR

As BM's VR and IDRs are capped at the sovereign rating, positive rating action would require an upgrade of the sovereign rating and in turn of the operating environment score, while maintaining strong financial metrics.

GSR

An upgrade of BM's GSR would be driven by an upgrade of the sovereign rating. However, this is not our base case scenario given the recent upgrade. Further improvement in the sovereign's balance sheet through lower levels of debt and higher sovereign net foreign assets could see a narrowing of the notches between the sovereign and the GSR.

HBON

IDRs

An upgrade of Oman's sovereign rating and an upward revision of Oman's Country Ceiling could result in an upgrade of HBON's IDR. This is unlikely at present given the recent upgrade.

VR

An upgrade of HBON's VR would require further improvement in the bank's asset quality while maintaining reasonable profitability and capitalisation.

NBO and BD

IDRs

An upgrade of NBO's and BD's VR and therefore IDRs would require further improvements in the banks' financial profiles, in particular asset quality, profitability, and capitalisation.

ABO and SIB

IDRs

An upgrade of ABO's IDR could come from an upgrade of its GSR or an upgrade of its VR.

SIB

An upgrade of SIB's IDR could come from an upgrade of its GSR or an upgrade of its VR. The latter could stem from a strengthening of its business profile and financial profile, which could come from the merger with Bank Nizwa and HBON, should it materialise.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

BM's senior unsecured debt ratings are aligned with its IDR as they represent unconditional, unsubordinated and unsecured obligations of the bank.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

BM's senior unsecured debt ratings are sensitive to changes in its IDR.

VR ADJUSTMENTS

The Operating Environment score of 'bb' has been assigned below the 'bbb' category implied score for Oman due the following adjustment reasons: Size and Structure of Economy (negative) and Sovereign Rating (negative).

HBON's Business Profile score of 'bb-' has been assigned above the 'b' category implied score due to the following reason: Group Benefits and Risks (positive).

Other VR adjustments are as outlined in the previous RAC on each bank, as referenced above.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

HBON's IDRs are linked to HSBC Holdings Plc's

The GSRs of BM, BD, NBO, SIB, and ABO are linked to the Omani sovereign rating

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

(C) 2022 Electronic News Publishing, source ENP Newswire