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Rating Action:

Moody's takes rating actions on four Omani banks and one finance company

16 May 2016

Rating action on banks follows downgrade of the Omani Government rating

Limassol, May 16, 2016 -- Moody's Investors Service (Moody's) has today concluded its review for downgrade on the ratings of four Omani banks (initiated on 3 March 2016) by downgrading the long-term deposit ratings of BankMuscat S.A.O.G. (to Baa1 from A3), Oman Arab Bank (SAOC) (to Baa2 from Baa1) and Bank Dhofar SAOG (to Baa2 from Baa1) and confirming the Baa1 long-term deposit rating of HSBC Bank Oman SAOG. Furthermore, Moody's has assigned a negative outlook to Bank Dhofar's long-term ratings while the ratings of the three other banks carry a stable outlook.

In addition to the four banks above, Moody's has also today affirmed the Ba3 corporate family rating and the B1 issuer rating of Al Omaniya Financial Services SAOG (Al Omaniya). The ratings continue to carry a negative outlook.

Today's rating actions follow Moody's downgrade of Oman's government issuer rating on 14 May 2016 to Baa1 (stable) from A3, concluding the review for downgrade initiated on 26 February 2016. The sovereign action reflects Moody's view that a protracted period of low oil prices will negatively affect Oman's sovereign credit profile beyond the previously anticipated level, despite the sizable fiscal consolidation efforts undertaken by the government (please see "Moody's downgrades Oman's government issuer rating to Baa1 with stable outlook, concluding review for downgrade"; https://www.moodys.com/research/--PR_348703).

The rating downgrades of three Omani banks reflect the reduced capacity of the Omani government to provide support to the banks in case of need, as indicated by the downgrade of the government's rating. However, Moody's assessment of the government's willingness to support the banks in case of need remains unchanged.

The confirmation of HSBC Bank Oman SAOG's (HBON) long-term deposit rating reflects Moody's unchanged assumption of a high probability of support from its highly rated parent HSBC Holdings Plc (A1 long-term senior unsecured debt rating, negative outlook) in case of need, which helps offset the Omani government's reduced capacity to support.

Moody's has also confirmed the baseline credit assessments (BCAs) of BankMuscat S.A.O.G. (BankMuscat), Oman Arab Bank SAOC (OAB) and Bank Dhofar SAOG (Bank Dhofar). The BCA of HBON, which was not under review, is unchanged.

RATINGS RATIONALE

--- REDUCED OMAN GOVERNMENT SUPPORT CAPACITY

The downgrade of three Omani banks' deposit ratings reflects the Omani government's weakened capacity to provide support to the banks in case of need, as indicated by the downgrade of the sovereign issuer rating to Baa1 (Stable) from A3 (Ratings Under Review) on 14 May 2016.

A protracted period of low oil prices has a more pronounced negative impact on Oman's economic performance, government finances, and balance-of-payments position than for most other oil exporters. Oman's fiscal and external break-even oil prices are forecast to remain some of the highest among countries in the Gulf Cooperation Council and Commonwealth of Independent States despite material adjustment, according to IMF estimates. For more information on the Sovereign action, please see https://www.moodys.com/research/--PR_348703.

Moody's assumptions on the willingness of the government to support banks remains unchanged, but the weaker fiscal capacity of the government to provide such support results in a reduction of one notch in the government support uplift incorporated in the banks' ratings.

--- UNCHANGED OMAN 'MODERATE' MACRO PROFILE

Oman's 'Moderate' Macro Profile already captures the expected impact on Omani banks of lower business volumes, lower investor confidence and weakened borrowers' repayment capacity that will result from lower economic growth. Moody's expects real GDP growth to drop to 2% in 2016 from 4% in 2015 and further to 0.8% in 2017, before picking up to around 1.5% to 2% during 2018-2020. In addition, the Macro Profile incorporates the expected further tightening in funding conditions owing to the banking system's reduced deposit inflows and high dependency on government related deposits.

--- BANK-BY-BANK SUMMARY OF ACTIONS

- BANKMUSCAT S.A.O.G. (BankMuscat) - Moody's downgraded BankMuscat's long-term deposit rating to Baa1 from A3 and confirmed the bank's standalone BCA at baa2. The outlook on the rating is stable.

The downgrade of BankMuscat's long-term deposit rating reflects the Omani government's weakened capacity to provide support.

The stable outlook on the BankMuscat's Baa1 long-term rating mirrors the stable outlook on the Omani government issuer rating. The stable outlook on the Omani government's rating reflects a number of strengths that are expected to counterbalance potential downside risks at the new rating level including low levels of government indebtedness and fiscal buffers.

The confirmation of the baa2 BCA reflects the bank's (1) sound asset quality and capitalisation metrics (2.5% Non-Performing Loans to gross loans ratio (NPL ratio) and 14% tangible common equity (TCE) to risk weighted assets (RWAs) ratio at year-end 2015), (2) solid profitability supported by a dominant domestic franchise and (3) modest market funding reliance, combined with sound liquidity buffers. The high credit and deposit concentration levels moderate these strengths.

- OMAN ARAB BANK (SAOC) (OAB) - Moody's downgraded OAB's long-term deposit rating to Baa2 from Baa1 and confirmed the bank's standalone BCA at ba1. The outlook on the rating is stable.

The downgrade of OAB's long-term deposit rating reflects the Omani government's weakened capacity to provide support.

The stable outlook on the OAB's Baa2 long-term rating mirrors the stable outlook on the Omani government issuer rating. The stable outlook on the Omani government's rating reflects a number of strengths that are expected to counterbalance potential downside risks at the new rating level including low levels of government indebtedness and fiscal buffers.

The confirmation of the ba1 BCA reflects the bank's (1) sound asset quality (2.4% NPL ratio at year-end 2015), (2) solid profitability and (3) low market funding reliance (1.9% market funding to tangible banking assets ratio), combined with sound liquidity buffers. Rapid credit growth and high credit concentrations combined with sound but declining capital buffers moderate these strengths.

- HSBC Bank Oman SAOG (HBON) - Moody's confirmed HBON's long-term deposit rating at Baa1. The outlook on the rating is stable. The bank's standalone BCA of ba1 and its adjusted BCA of baa2, which incorporate parental support, were not under review and remain unchanged.

The confirmation of HBON's Baa1 long-term deposit rating reflects Moody's continued assumption of a high probability of support from its highly rated parent HSBC Holdings Plc (A1 long-term senior unsecured debt rating, negative outlook) in case of need, which helps offset the Oman government's reduced capacity to support.

The stable outlook on the HBON's long-term rating mirrors the stable outlook on the Omani government issuer rating. The stable outlook on the Omani government's rating reflects a number of strengths that are expected to counterbalance potential downside risks at the new rating level including low levels of government indebtedness and fiscal buffers.

- Bank Dhofar SAOG (Bank Dhofar) - Moody's downgraded Bank Dhofar's long-term deposit rating to Baa2 from Baa1 and confirmed the bank's standalone BCA at ba1. The outlook on the rating is negative.

The downgrade of Bank Dhofar's long-term deposit rating reflects the Omani government's weakened capacity to provide support.

The negative outlook on Bank Dhofar's Baa2 long-term deposit rating reflects potential additional pressures on the bank's solvency profile, stemming from (1) rapid net credit growth (21% during 2015 compared to the 8% local average in 2015) in a weakening operating environment, and (2) a relatively low and declining 10.0% TCE to RWAs ratio (13.4% local average and 12% ba1 global median).

Moderating these risks -- and underpinning the confirmation of the ba1 BCA -- are the bank's relatively low problem loans to gross loans ratio (1.1% compared to 2.1% Oman average) and high loan loss reserves to problem loans ratio (208% compared to 147% local average at year-end 2015), which compare favourably to ba1 global peers. Furthermore, the bank exhibits sound liquidity buffers (21.8% liquid banking assets to tangible banking assets ratio at YE 2015) and a modest reliance on market funding (10.3% market funds to tangible banking assets ratio).

-- AFFIRMATION OF AL OMANIYA'S RATINGS; OUTLOOK REMAINS NEGATIVE

The affirmation of Al Omaniya's B1 issuer rating reflects its strong asset risk metrics, high capitalisation levels and solid profitability metrics.

The affirmation of the firm's Ba3 CFR reflects an unchanged one-notch uplift based on our assessment of affiliate support from BankMuscat in case of need, reflecting the longstanding strong financial and operational ties between the two companies.

The company's negative outlook continues to reflect the potential impact from tightening liquidity conditions and softening economic growth on the company's credit profile, given the firm's reliance on secured confidence sensitive wholesale funding.

WHAT COULD CHANGE THE RATINGS -- UP

--- BANKMUSCAT, OAB AND HBON

Upward pressure on BankMuscat, OAB and HBON's ratings could develop primarily from improvements in funding and credit conditions, driven by reduced operating environment pressures as captured in an improved Macro Profile.

More specifically, upwards pressure on BankMuscat's ratings could develop through (1) a significant decrease in credit and funding concentrations, and/or (2) a material improvement in the profitability metrics, and/or (3) a significant increase in the bank's unencumbered liquid resources.

Upward pressure on OAB's ratings could develop through (1) a material increase in the capitalisation metrics, and/or (2) a significant reduction in the unseasoned potion of the loan book, and/or (3) a material increase in the bank's liquidity buffers.

Upward pressure on HBON's ratings could develop through a material improvement in the bank's profitability and asset-quality metrics.

--- BANK DHOFAR

Upward pressure on the ratings of Bank Dhofar is limited given the negative outlook on its ratings. Continued resilience of the bank's asset quality metrics as the loan book seasons combined with a material improvement in the bank's capitalisation buffers could lead to a stabilisation of the ratings.

--- AL OMANIYA

Upward pressure on the ratings of Al Omaniya is limited given the negative outlook on its ratings. Continued resilience of the firm's liquidity and funding metrics amidst the current tightening environment could lead to a stabilisation of the ratings.

WHAT COULD CHANGE THE RATINGS -- DOWN

--- BANKMUSCAT, OAB AND HBON

Downward pressure on BankMuscat, OAB and HBON's ratings could develop from: (1) reduced support capacity as described by a further lowering of the sovereign rating and/or (2) a weakening of their solvency and liquidity metrics stemming from a material deterioration in the banks' operating environment.

--- BANK DHOFAR

Downward pressure on the ratings of Bank Dhofar could materialise through a material weakening of the bank's asset quality metrics as the loan book seasons combined with continued relaively low capitalisation levels.

--- AL OMANIYA

Downward pressure on Al Omaniya's ratings could develop through a combination of: (1) a significant deterioration in the company's funding and liquidity metrics, and/or (2) a material increase in the firm's funding cost and/or (3) a material weakening in the company's asset quality metrics.

The principal methodology used in rating BankMuscat S.A.O.G., Bank Dhofar SAOG, HSBC Bank Oman SAOG and Oman Arab Bank (SAOC) was Banks published in January 2016.

The principal methodology used in rating Al Omaniya Financial Services SAOG was Finance Companies published in October 2015.

Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

List of affected ratings

Downgrades:

..Issuer: Bank Dhofar SAOG

.... LT Bank Deposits (Foreign Currency and Local Currency), Downgraded to Baa2 Negative from Baa1 Ratings Under Review

.... Senior Unsecured MTN, Downgraded to (P)Baa2 from (P)Baa1

.... Counterparty Risk Assessment, Downgraded to Baa1(cr) from A3(cr)

..Issuer: BankMuscat S.A.O.G.

.... LT Bank Deposits (Foreign Currency and Local Currency), Downgraded to Baa1 Stable from A3 Ratings Under Review

.... Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 Stable from A3 Ratings Under Review

.... Senior Unsecured MTN, Downgraded to (P)Baa1 from (P)A3

.... Subordinate MTN, Downgraded to (P)Baa2 from (P)Baa1

.... Counterparty Risk Assessment, Downgraded to Baa1(cr) from A3(cr)

..Issuer: HSBC Bank Oman SAOG

.... Counterparty Risk Assessment, Downgraded to Baa1(cr) from A3(cr)

..Issuer: Oman Arab Bank (SAOC)

.... LT Bank Deposits (Foreign Currency and Local Currency), Downgraded to Baa2 Stable from Baa1 Ratings Under Review

.... Counterparty Risk Assessment, Downgraded to Baa1(cr) from A3(cr)

Confirmations:

..Issuer: Bank Dhofar SAOG

.... ST Bank Deposits (Foreign Currency and Local Currency), Confirmed at P-2

.... Adjusted Baseline Credit Assessment, Confirmed at ba1

.... Baseline Credit Assessment, Confirmed at ba1

.... Counterparty Risk Assessment, Confirmed at P-2(cr)

..Issuer: BankMuscat S.A.O.G.

.... Adjusted Baseline Credit Assessment, Confirmed at baa2

.... Baseline Credit Assessment, Confirmed at baa2

..Issuer: HSBC Bank Oman SAOG

.... LT Bank Deposits (Foreign Currency and Local Currency), Confirmed at Baa1 Stable from Ratings Under Review

.... ST Bank Deposits (Foreign Currency and Local Currency), Confirmed at P-2

..Issuer: Oman Arab Bank (SAOC)

.... ST Bank Deposits (Foreign Currency and Local Currency), Confirmed at P-2

.... Adjusted Baseline Credit Assessment, Confirmed at ba1

.... Baseline Credit Assessment, Confirmed at ba1

.... Counterparty Risk Assessment, Confirmed at P-2(cr)

Affirmations:

..Issuer: Al Omaniya Financial Services SAOG

.... LT Issuer Rating (Foreign Currency and Local Currency), Affirmed B1 Negative

.... LT Corporate Family Rating (Foreign Currency and Local Currency), Affirmed Ba3 Negative

Outlook Actions:

..Issuer: Bank Dhofar SAOG

....Outlook, Changed To Negative From Rating Under Review

..Issuer: BankMuscat S.A.O.G.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: HSBC Bank Oman SAOG

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Oman Arab Bank (SAOC)

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Al Omaniya Financial Services SAOG

....Outlook, Remains Negative

The local market analyst for BankMuscat S.A.O.G., Bank Dhofar SAOG, Oman Arab Bank (SAOC) and Al Omaniya Financial Services SAOG ratings is Mik Kabeya, Analyst, Financial Institutions Group,

Journalist: 44 20 7772 5456, Subscribers: 44 20 7772 5454.

The local market analyst for HSBC Bank Oman SAOG ratings is Olivier Panis, VP-Sr Credit Officer, Financial Institutions Group, Journalist: 44 20 7772 5456, Subscribers: 44 20 7772 5454.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elena Panayiotou
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes rating actions on four Omani banks and one finance company
No Related Data.
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