Capital Intelligence affirms Ahlibank FSR ratings at BBB

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The international credit rating agency Capital Intelligence (CI) on Tuesday said that it has affirmed Oman-based Ahli Bank’s financial strength rating (FSR) at ‘BBB’, in view of the bank’s very sound loan asset quality.
Constraining the FSR is the bank’s very tight liquidity metrics, customer deposit funding concentrations, low non-interest income (NII) coupled with margin compression. The challenging operating environment as a result of a fall in oil price is also a rating constraint. Given the level of ownership and management control by the strategic shareholder Ahli United Bank (AUB) under the Technical and Management Services Agreement (TMSA), the bank’s long and short-term foreign currency ratings are affirmed at ‘BBB+’ and ‘A2’, respectively. The support level is maintained at ‘3’, underscoring the high likelihood of support from the Omani authorities and from AUB in case of need. The outlook for all the ratings remains ‘Stable’.
Ahli Bank is a well-managed institution following a prudent credit policy and executing a clear business strategy. Risk management and systems benefit from the expertise provided by AUB, the largest shareholder, under the five-year renewable TMSA between Ahli Bank and AUB. Key senior employees are seconded from AUB.
The bank continues to successfully expand and diversify its business franchise in Oman, while gaining larger shares of the loan and customer deposit markets. Although non-performing loans (NPLs) grew further in the first half of the current year, albeit from a low base, Ahli Bank’s loan asset quality remains very sound as demonstrated by an exceptionally low NPL to gross loans ratio and more than full loan-loss reserve coverage.
Ahli Bank’s balance sheet liquidity remains very tight, reflecting the large share of loans in total assets combined with the increased utilisation of short-term interbank deposit funding in recent periods. Although customer deposits have continued to expand briskly over the last four years, this has also been accompanied by strong credit expansion.
As a result, Ahli Bank’s’s liquidity ratios remain noticeably weaker than other Omani banks. However, AB’s effective liquidity in fact depends on the unused borrowing capacity under the committed lines of credit at its disposal (including from AUB). These remain significant and are a very important liquidity risk mitigating factor. The strong expansion in customer deposits was again led by savings accounts and to lesser extent relatively expensive time deposits.
The latter however still constitute a significant share of Ahli Bank’s total customer deposits. This shortcoming is being addressed through expansion of the branch network and the Islamic windows, which is helping to gather cheaper savings and current deposits. Over time, the increased share of savings and demand balances is expected to improve customer deposit concentrations.
The bank’s capital adequacy ratio (Basel III standards) improved in the first half of 2015, due to a subordinated debt issue (Tier 2 capital). Internal capital generation also increased to a strong level due to the full retention of net profit.