Funding costs of Omani banks to rise after Fitch downgrade, analysts say

Five Omani banks downgraded by a credit ratings agency would not suffer any immediate impact, but their future funding costs would rise, analysts said on Wednesday.

Fitch on Monday downgraded the long-term issuer default rating for Bank Muscat, National Bank of Oman, Bank Dhofar, Bank Sohar and Ahli Bank because of low oil prices and their impact on Oman’s fiscal position.

The ratings agency maintained its rating for HSBC Bank Oman, thanks to the support of its parent, HSBC Holdings.

“The downgrades reflect Fitch’s view that the Omani sovereign’s ability to support the banking system has weakened,” the agency said. “Lower oil prices and higher-than-budgeted government expenditure have led to a major deterioration of Oman’s fiscal position.”

The international benchmark Brent crude has lost 60 per cent of its value since peaking at US$115 a barrel in June last year.

Oman, the biggest oil producer in the Middle East outside Opec, is struggling with its finances because of the oil price slump and will post a deficit this year, according to IMF estimates.

The country racked up a budget deficit of 1.92 billion rials (Dh18.2bn) in the first half of this year, against a surplus of 250 million rials for the same period last year, according to the Finance Ministry’s provisional data this month.

Omani lenders, like their Arabian Gulf peers, heavily rely on government projects and revenue to generate profit. Any economic slowdown or curtailing of projects because of the oil price rout would impact their profitability.

Any impact of the Fitch downgrade on the shares of Omani banks has been unclear, given that most Arabian Gulf equities fell this week because of the global stock market rout.

“We believe the impact is already seen in terms of price performance. Most banks in Oman are trading closer to their book value or below their book value,” said Kanaga Sundar, the head of research at Gulf Baader Capital Markets in Muscat. “The fall in the stock prices is basically related to the volatility of global equities, rather than the impact of the Fitch downgrade.”

Fitch is not the only credit ratings agency to downgrade its view of Oman. In February, Standard & Poor’s downgraded Oman’s sovereign rating, while Moody’s affirmed Oman’s A1 government rating and changed the rating outlook to negative from stable.

The downgrades will increase the banks’ cost of borrowing in the long term, analysts say.

“Banks across the GCC are issuing perpetual sukuks to boost their Tier 1 capital,” said Chiradeep Ghosh, a banking analyst at Securities and Investment Company in Bahrain.

“Despite Omani banks’ Tier 1 ratio currently being above the regulated level, they will eventually have to issue perpetual bonds or sukuk to boost their capital position. The rating downgrade would adversely affect the funding cost of these bonds or sukuk.”

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Dania Saadi

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