Fitch Affirms Ahli Bank S.A.O.G At ‘BBB+’; Outlook Stable
Fitch Ratings has affirmed Ahli Bank S.A.O.G’s (ABO) Long-term Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook, Short-term IDR at ‘F2’ and Viability Rating (VR) at ‘bb+’. A full list of rating actions is at the end of this rating action commentary.
ABO’s Support Rating and Support Rating Floor reflect the high probability of support from the Omani authorities, if needed, given the government’s strong supportive stance towards the domestic system.
As the bank’s IDRs are at their Support Rating Floor, the IDRs, the Support Rating and Support Rating Floor would be sensitive to a change in Fitch’s perception of the willingness or ability of the state of Oman to support ABO, if required.
ABO’s VR takes into account its rising profitability and sound asset quality. This is offset by high concentrations on both sides of the balance sheet, the dominance of institutional customer deposits in the bank’s funding structure and pressure on liquidity caused by fast loan growth.
Erosion of capital ratios and further pressure on liquidity could have a negative impact on the VR. Upside potential for the VR is limited given the high concentrations and limited franchise, but may be possible if ABO is able to develop its funding profile, improve liquidity and reduce concentrations.
ABO’s VR is enhanced by its relatively strong management, solid risk management systems and practices ensuing from being part of the AUB group. In Fitch’s opinion, ABO could also look for support from its 35%-owner Ahli United Bank BSC, Bahrain (AUB; ‘BBB+’/Stable), although this is currently not factored into the ratings.
Operating profit continued to rise in 2011 and H112 – a trend that should continue over the medium term – driven by healthy core earnings and solid cost control. Performance is supported by net interest income (the main contributor to earnings), which benefitted from stronger business volumes and broadly stable funding costs. Loan impairment charges, although rising, remain low. ABO has one of the lowest cost/income ratios in the sector (30% in 2011), which it will endeavour to maintain.
Non-equity funding is mainly comprised of customer deposits (86% of non-equity funding at end-H112), the majority of which are institutional. Accordingly, depositor concentration (albeit falling) is high: larger deposits are mainly from government and related entities and ABO’s pension fund shareholders, hence regarded by the bank as stable.
The loans/deposits ratio rose to a high 116% at end-H112, putting pressure on liquidity, and is unlikely to improve significantly in 2012. The bank’s liquidity position is underpinned by a (historically stable) customer deposit base, and supported by committed credit lines (OMR25m from AUB, amongst other banks) and a moderate stock of liquid assets.
ABO’s asset quality is a strength and indicators typically outperform the sector. Non-performing loans (NPLs) stood at a low 0.6% of gross loans at end-H112, comparing favourably with peers. NPLs were fully covered by reserves. Over half of NPLs emanated from the retail segment, mainly related to consumer lending. NPLs could rise moderately over the medium term as newer loans season, yet asset quality indicators should remain reasonable given their current levels.
Capital is satisfactory in light of the bank’s risks. ABO’s capital adequacy indicators are in line with peers’ and comfortably comply with local regulatory requirements. The Fitch Core Capital ratio stood at 12.5% at end-H112.
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