OREANDA-NEWS. Fitch Ratings has affirmed six Omani banks' Long-term Issuer Default Ratings (IDRs) and upgraded two of the banks' Viability Ratings. The Outlooks on all six banks are Stable.

Five of the banks have their IDRs based on support from the Omani sovereign. They are Bank Muscat's (BM) at 'A-' and National Bank of Oman (NBO), Bank Dhofar, Bank Sohar and Ahli Bank SAOG (ABO) at 'BBB+'. The IDR for the remaining bank HSBC Bank Oman's (HBON) has been affirmed at 'A+', based on support from its ultimate parent, HSBC Holdings PLC (HSBC; AA-/Stable).

At the same time, Fitch has upgraded Bank Sohar's Viability Rating (VR) to 'bb+' from 'bb', and HBON's VR to 'bbb-' from 'bb+'. Fitch has affirmed BM's VR at 'bbb', NBO's and ABO's VR at 'bbb-' and Bank Dhofar's VR at 'bb+'.

HBON's VR has been upgraded mainly because Fitch expects reduced risks with the bank's asset quality (no longer of high influence on the VR) and signs of improving profitability. Bank Sohar's VR has been upgraded as a result of strengthened capitalisation, leaving the bank's capitalisation in line with similarly rated peers, and no longer constraining the VR.

A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
BM's, NBO's, Bank Dhofar's, Bank Sohar's and ABO's IDRs, Support Ratings (SRs) and Support Rating Floors (SRFs) reflect Fitch's expectation of an extremely high probability of support from the Omani authorities in case of need. Oman's strong ability to provide support to the banking system, combined with our belief that there would be a strong willingness to do so, underpins Fitch's assessment.

BM's SRF is one notch above that of the other banks in Oman, because of BM's dominant role in the sector and its greater systemic importance.

HBON's IDRs and SR are driven by Fitch's expectation of an extremely high probability of support available to the bank from HSBC. Fitch considers HBON a strategically important subsidiary of HSBC because of its importance to the group's regional strategy and franchise, although Oman is not necessarily in itself a core market. HBON's Long-term IDR is notched down once from HSBC's Long-term IDR. HSBC does not have full ownership of the bank (although it has board and management control), which is also reflected in the notching.

VRs
Omani banks' VRs benefit from a stable operating environment, supported by the government's capital investment programme that drives solid GDP growth and creates lending opportunities for domestic banks. However, the economy is still heavily dependent on oil and vulnerable to continued low oil prices.

BM's VR reflects the bank's dominant franchise in Oman, which supports its ability to generate healthy and stable operating profits, and within the context of the operating environment, resilient asset quality and sound capitalisation. It also takes into account fairly high concentrations on both sides of the balance sheet, as is common in the region.

NBO's VR reflects a limited franchise and capitalisation which given high loan concentrations, is only adequate in Fitch's view. The VR also factors in the bank's solid profitability, sound asset quality and adequate liquidity.

HBON's VR is underpinned by the bank's company profile, which benefits from being part of the HSBC group. Sound capitalisation and liquidity ratios are also factored into the rating, particularly as Fitch expects ample liquidity and capital would be available from the group in case of need. Impaired loans remain high compared with domestic peers, although reserves for impaired loans appear adequate. The rating further factors in our expectation that the bank's current more conservative underwriting standards should lead to improving asset quality.

Bank Dhofar's VR reflects the bank's modest franchise, and improved capitalisation following capital-raising in 2Q15, albeit still moderate in light of lending concentrations. The VR also reflects a deposit-funded loan book with satisfactory liquidity, and a fairly low risk appetite, which is reflected in healthy asset quality, despite high lending concentrations.

ABO's VR benefits from the bank being part of Ahli United Bank group and its wider regional network. It also factors in the bank's just adequate capitalisation, in light of lending concentrations, and comparatively small franchise in Oman. ABO's funding is fairly concentrated, and the bank is more reliant on wholesale markets to fund its loan book than its peers. However, profitability has remained stable and asset quality compares well with peers'.

Bank Sohar's VR factors in its improved capitalisation, which is now in line with that of similarly rated peers, and the bank's sound asset quality. As with peers, however, Bank Sohar's lending is concentrated, which could lead to risks should one of its larger exposures become impaired, particularly given that capitalisation is still only adequate, in Fitch's view.

RATING SENSITIVITIES

IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
BM's, NBO's, Bank Dhofar's, Bank Sohar's and ABO's IDRs, SRs and SRFs are sensitive to a change in Fitch's assumptions around the Omani authorities' propensity or ability to provide timely support to the banking sector. The most likely change would arise as a result of a weakening of the sovereign's ability to support domestic banks. Oman depends heavily on oil revenues and is one of the most vulnerable in the Gulf Cooperation Council, along with Bahrain, to low oil prices, despite some diversification over the past decade.

HBON's Long-term IDR is sensitive to a change in HSBC's ability, as reflected in its ratings, or willingness to provide support.

VR
BM's VR is the highest in Oman and is constrained by the operating environment. An upgrade is unlikely and would be contingent on sustained improvements in the Omani economy, including continued diversification and private sector growth. A downgrade of the VR would most likely be a result of a material weakening of capital ratios or worsening of asset quality.

Weakening of NBO's capitalisation or significant worsening of asset quality could put pressure on the VR. An upgrade of the VR would be contingent on a significant strengthening of the bank's franchise, while maintaining strong capital, liquidity and asset quality metrics.

HBON's VR is sensitive to material deterioration of asset quality, although this is not Fitch's expectation. Following the upgrade of HBON's VR, upside potential is now limited.

An upgrade of Bank Dhofar's VR would be contingent on the bank significantly strengthening its franchise in Oman and its capitalisation. Downward pressure would most likely be a result of weakening capital or worsening asset quality.

Bank Sohar's VR is sensitive to weakening capital, whether as a result of rapid growth or asset quality weakening, although this is not Fitch's expectation.

ABO's VR is sensitive to increasing reliance on interbank markets to fund its loan book. Capitalisation is also just adequate given the bank's high loan book concentration and the VR is sensitive to capital deterioration, or significant worsening of asset quality. Given the bank's fairly small franchise in Oman, an upgrade to the VR is not likely.

The rating actions are as follows:

Bank Muscat
Long-term Foreign Currency IDR affirmed at 'A-', Outlook Stable
Short-term Foreign Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Senior unsecured notes affirmed at 'A-'
Senior unsecured - EMTN programme affirmed at 'A-'
Senior unsecured - EMTN programme affirmed at 'F2'

HSBC Bank Oman
Long-term Foreign Currency IDR affirmed at 'A+', Outlook Stable
Short-term Foreign Currency IDR affirmed at 'F1'
Viability Rating upgraded to 'bbb-' from 'bb+'
Support Rating affirmed at '1'

Bank Dhofar
Long-term Foreign Currency IDR affirmed at 'BBB+', Outlook Stable
Short-term Foreign Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'

National Bank of Oman
Long-term Foreign Currency IDR affirmed at 'BBB+', Outlook Stable
Short-term Foreign Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'

Ahli Bank SAOG
Long-term Foreign Currency IDR affirmed at 'BBB+', Outlook Stable
Short-term Foreign Currency IDR affirmed at 'F2'
Long-term Local Currency IDR affirmed at 'BBB+', Outlook Stable
Short-term Local Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'

Bank Sohar
Long-term IDR affirmed at 'BBB+', Outlook Stable
Short-term IDR affirmed at 'F2'
Viability Rating upgraded to 'bb+' from 'bb'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'