OREANDA-NEWS. Fitch Ratings has downgraded Bank Muscat's (BM) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-' and National Bank of Oman's (NBO), Bank Dhofar's, Bank Sohar's and Ahli Bank SAOG's (ABO) to 'BBB' from 'BBB+'. The Outlooks on all the banks' Long-term IDRs are Stable. The downgrades follow a review of Fitch's assessment of Oman's ability to support domestic banks.

At the same time, Fitch has affirmed HSBC Bank Oman's (HBON) IDR at 'A+' based on support from its ultimate parent, HSBC Holdings PLC (HSBC; AA-/Stable). The Outlook has been revised to Negative from Stable.

Viability Ratings are not affected by today's rating action.

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

The downgrades reflect Fitch's view that the Omani sovereign's ability to support the banking system has weakened. Lower oil prices and higher-than-budgeted government expenditure have led to a major deterioration of Oman's fiscal position. The IMF estimates that the fiscal deficit will reach double digits, estimated at 14.8% of GDP in 2015 and 11.6% in 2016, from a deficit of 1.5% in 2014. The scale of the budgetary shock highlights Oman's dependence on hydrocarbons. Fitch forecasts an annual average oil price of USD65/bl in 2015 and USD75/bl in 2016.

Oman's sovereign balance sheet is strong, which mitigates pressures from lower oil prices. However, this position will deteriorate as sovereign wealth funds are drawn down. The IMF forecasts that, without further fiscal adjustment, these buffers would be exhausted by the end of the decade, assuming government debt is contained at 25% of GDP.

The government's ability to enact major reforms to narrow the budget deficit over the medium term remains untested. According to the IMF, public expenditure has increased to an estimated 50.3% of GDP in 2014 from 36.5% in 2010, a level comparable to northern Europe.

Oman's economic growth should remain resilient to the drop in oil prices. The IMF projects growth of 4.6% in 2015, up from an estimated 2.9% in 2014. The hydrocarbon sector will grow faster in 2015 as the government increases current oil expenditures to boost production and counteract lower oil prices. However, lower incremental returns from enhanced oil recovery techniques will slow oil production by 2016.

The non-hydrocarbon sector should remain buoyant over this same period. Expansion in the building and construction sectors, underpinned by government projects, as well as personal services and tourism will support this outlook.

KEY RATING DRIVERS
IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
BM, NBO, Bank Dhofar, Bank Sohar's and ABO's IDRs, Support Ratings (SRs) and Support Rating Floors (SRFs) reflect Fitch's expectation of a high probability of support from the Omani authorities in case of need, based on the sovereign's strong ability and willingness to do so. Fitch makes a distinction between BM's SRF and that of the other banks in Oman, because of BM's dominant role in the sector (about 38% of sector assets and deposits), and therefore 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 to be a strategically important subsidiary of HSBC, given its importance to the group's regional strategy and franchise. Fitch does not consider it to be a core subsidiary as HSBC does not have full ownership of the bank (although it has board and management control) and because of HBON's small size relative to other core HSBC subsidiaries globally. HBON's Long-term IDR is notched down once from HSBC's Long-term IDR.

The Stable Outlook on BM's, NBO's, Bank Dhofar's, Bank Sohar's and ABO's IDRs reflects Fitch's view that the probability of support from the Omani authorities to domestic banks is not likely to diminish significantly over the medium term. The Negative Outlook on HBON's IDR reflects our view that an increase in perceived country risks would result in support from HSBC being capped by Omani transfer and convertibility risk.

RATING SENSITIVITIES
IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
BM's, NBO's, BD'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 main risk factors driving sovereign support are a failure to contain its budget deficit, leading to rapid erosion of fiscal and external buffers. This could arise due to a lack of fiscal adjustment, lower-than-expected oil prices over the medium term, or a contested succession process that disrupts government policy-making and political stability. A robust fiscal policy response to narrow Oman's large fiscal deficit, for example by diversifying revenues and lowering expenditures, would be positive for sovereign support.

HBON's Long-term IDRs and SR are sensitive to a change in Fitch's view of HSBC's ability or propensity to provide support. The Negative Outlook reflects Fitch's view that HBON's IDR would be downgraded if the agency believes that HSBC's ability or willingness to support has diminished, including as a result of a significant increase in country risk]

The rating actions are as follows:

Bank Muscat
Long-term foreign currency IDR downgraded to 'BBB+' from 'A-', Outlook Stable
Short-term foreign currency IDR affirmed at 'F2'
Viability Rating unaffected at 'bbb'
Support Rating downgraded to '2' from '1'
Support Rating Floor revised to 'BBB+' from 'A-'
Senior unsecured notes downgraded to 'BBB+' from 'A-'
Long-term senior unsecured - EMTN programme downgraded to 'BBB+' from 'A-'
Short-term senior unsecured - EMTN programme affirmed at 'F2'

HSBC Bank Oman
Long-term foreign currency IDR affirmed at 'A+', Outlook revised to Negative from Stable
Short-term foreign currency IDR affirmed at 'F1'
Viability Rating unaffected at 'bbb-'
Support Rating affirmed at '1'

Bank Dhofar
Long-term foreign currency IDR downgraded to 'BBB' from 'BBB+', Outlook Stable
Short-term foreign currency IDR affirmed at 'F2'
Viability Rating unaffected at 'bb+'
Support Rating affirmed at '2'
Support Rating Floor revised to 'BBB' from 'BBB+'

National Bank of Oman
Long-term foreign currency IDR downgraded to 'BBB' from 'BBB+', Outlook Stable
Short-term foreign currency IDR affirmed at 'F2'
Viability Rating unaffected at 'bbb-'
Support Rating affirmed at '2'
Support Rating Floor revised to 'BBB' from 'BBB+'

Ahli Bank SAOG
Long-term foreign currency IDR downgraded to 'BBB' from 'BBB+', Outlook Stable
Short-term foreign currency IDR affirmed at 'F2'
Long-term local currency IDR downgraded to 'BBB' from 'BBB+', Outlook Stable
Short-term local currency IDR affirmed at 'F2'
Viability Rating unaffected at 'bbb-'
Support Rating affirmed at '2'
Support Rating Floor revised to 'BBB' from 'BBB+'

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