Fitch Affirms National Bank of Oman at ‘BB-‘; Outlook Negative

      Published on Thursday, 27 August , 2020      753 Views     
Fitch Affirms National Bank of Oman at ‘BB-‘; Outlook Negative

Fitch Ratings has affirmed National Bank of Oman SAOG’s (NBO) ‘BB-‘ Long-Term Issuer Default Rating (IDR) and ‘bb-‘ Viability Rating (VR).

The Outlook on the Long-Term IDR is Negative. Fitch has also revised down the Support Rating Floor (SRF) to ‘B’ from ‘B+’.

The ratings actions follow the downgrade of Oman’s sovereign rating on 17 August 2020 to ‘BB-‘ from ‘BB’ (Fitch Downgrades Oman to ‘BB-‘; Outlook Negative).

The Negative Outlook on NBO’s Long-Term IDR mirrors that on the sovereign but also incorporates the downside risks to the bank’s credit profile resulting from the economic and financial implications of the coronavirus pandemic.

The revision of NBO’s SRF is due to the sovereign’s weaker ability to provide support, as reflected by the downgrade of its rating.

The Negative Outlook reflects the high correlation between the sovereign and NBO’s credit profile but also that the spread of coronavirus fallout will add to the bank’s earnings and asset quality amid a domestic operating environment that was already increasingly challenging prior to the outbreak. Fitch has lowered its operating environment score for Omani banks to ‘bb-‘ (with a negative trend) from ‘bb’. GDP fell 1.3% in 2019 with substantially weaker prospects for the next two years (2020: -4.9%; 2021: -1.5%), reflecting the financial and economic impact of lockdown measures, lower oil prices and the government’s expected continued restrictive fiscal policy.

Support measures implemented by the Central Bank of Oman (CBO) should help counteract the economic impact of the virus and mitigate asset-quality erosion at banks. These include deferment payment measures (typically six months) across retail and corporate borrowers. Banks will not automatically have to classify loans as impaired if the borrower makes use of payment deferrals, benefiting IFRS 9 impairment ratios. As a result, the extent of asset-quality deterioration is likely to take time to emerge. Loan impairment charges in 1H20 averaged 0.9% of loans (annualised) for Fitch-rated banks, with a range of 0.4%-1.9%, up from an average of 0.4% over the previous four years.


IDRs and VR

The IDR of NBO is driven by its standalone credit profile as indicated by its VR.

The affirmation of the VR primarily reflects the bank’s still adequate capital, profitability and funding & liquidity profile, all of which Fitch scores at ‘bb-‘. At the same time, risks to its standalone credit profile have increased due to the economic downturn and financial-market volatility, which have heightened pressure on asset quality, capitalisation, profitability, funding and liquidity.

NBO entered the economic downturn with an above-average level of impaired loans. The impaired loans (Stage 3 loans) ratio increased slightly to 5.2% at end-1H20 (end-2019: 4.9%) but did not yet reflect the impact of the pandemic. We expect to see deterioration across the loan book and have revised down our asset-quality score to ‘b+’, given the relatively weak starting point, although the full extent will likely take time to emerge as borrower-support measures expire.

Capitalisation is maintained with moderate buffers over the regulatory minimums, with an end-1H20 CET1 ratio of 11.4% (down 80bp from end-2019 due to some risk-weighted asset (RWA) growth and dividend distributions for 2019) providing OMR106 million headroom (3.2pp) over current CET1 requirements, the latter of which have reduced due to the recent cut in the capital conservation buffer to 1.25% (from 2.5%). Given high single-name concentrations, profitability provides only a moderate buffer to absorb increased loan impairment charges without hitting capital. Therefore, a prolonged crisis leading to significant asset-quality deterioration could put capitalisation under pressure. We expect slower loan growth and likely cuts to dividends to partly offset these negative factors.

Prior to the coronavirus outbreak, NBO’s profitability had been a rating strength and broadly stable, supported by one of the sector’s highest net interest margins and fairly low loan impairment charges. Operating profit/RWA fell to 1H20 from 1.7% in 2019 as the bank increased its expected credit loss provisions to 0.6% of loans annualised (2019: 0.3%), in anticipation of a sharp economic contraction. Despite the increase, this ratio was towards the lower end of peers’ and at the same level as during a more benign year in recent history (2017). While the ultimate impact on profitability will depend on the extent of the economic deterioration, the speed of the economic recovery and the effectiveness of borrower-support programmes, this suggests that higher provisioning may be in prospect. We have reflected the bank’s weaker earnings outlook with a negative trend on the bank’s ‘bb-‘ earnings & profitability score.

NBO’s funding profile is generally stable. Deposit concentration is below peers’, reflecting a stronger retail banking franchise but remains high due to a reliance on deposits from government-related entities. NBO is exposed to tightening liquidity if the government withdraws deposit from the banking system, the risk of which has increased, in our opinion, due to weaker public finances. Liquidity is sound with an end-1H20 liquidity coverage ratio of 199%.


Fitch believes that the sovereign’s ability to support its banking system has weakened, driven by a significant widening of its fiscal deficit, which Fitch expects to be exacerbated by the outbreak of coronavirus and lower-for-longer oil prices. Fitch has thus revised down NBO’s SRF to ‘B’ from ‘B+’ on the back of the sovereign rating downgrade, while affirming the bank’s ‘4’ Support Rating. The continued erosion of Oman’s fiscal and external balance sheets reduces the sovereign’s financial flexibility to provide support.

Nonetheless, Fitch believes the Omani authorities’ willingness to support NBO remains high, partly because of high contagion risk (small number and high concentration of banks in the system) and the importance of the banking system in building the local economy.



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

A revision of the Outlook on the Long-Term IDR to Stable would be possible if the impact of the coronavirus on the Omani economy is fairly short, followed by a swift recovery and diminishing pressure on asset quality and profitability, cushioning the financial impact on the bank’s capitalisation, which is of high importance to the rating. This would also require the sovereign rating to return to a Stable Outlook. An upgrade would require an upgrade of the sovereign rating.

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

NBO’s ratings could be downgraded in the event of prolonged deterioration in the Omani economy that leads to a significant further weakening of the bank’s asset quality and ability to generate capital organically. The ratings would be downgraded if NBO’s CET1 ratio looks set to fall below current levels without a clear path for a return to previous levels above 12% within 18-24 months and/or materially higher levels of capital encumbrance by unreserved impaired loans. The ratings could also come under pressure if a funding stress materialises, particularly if we see government deposits exiting the banking system.

Given the bank’s very high direct exposure to Oman, a downgrade of the sovereign rating could also lead to a downgrade of NBO’s ratings.


NBO’s SR and SRF are sensitive to a change in Fitch’s assumptions around the Omani authorities’ propensity or ability to provide timely support to the banking sector or the bank. Assuming no change in propensity, the SRF would likely be revised downwards in the event of a sovereign downgrade and revised upwards in the event of a sovereign upgrade.



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 []


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


The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit

National Bank of Oman SAOG LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
Viability bb- Affirmed bb-
Support 4 Affirmed 4
Support Floor B Support Rating Floor Revision B+

Additional information is available on

Category Business | 2020/08/27 latest update at 1:20 PM
Source : Fitch Ratings | Photocredit : Google
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