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Moody's upgrades ratings of BM, NBO, OIB and OAB

ABU DHABI — Moody's Investors Service has upgraded the long-and short-term foreign currency deposit ratings of BankMuscat (BM), National Bank of Oman (NBO), Oman International Bank (OIB) and Oman Arab Bank (OAB) to Baa1/Prime-2 (P-2) from Baa3/P-3.

The ratings of Alliance Housing Bank (AHB) has been upgraded to Baa2/P-3 from Baa3/P-3, and the foreign currency senior unsecured debt rating of BM to Baa1 from Baa3.

At the same time, Moody's has also upgraded the local currency senior debt ratings of BM to Baa1 from Baa3, and the long- and short-term local currency deposit ratings of AHB to Baa2/P-3 from Baa3/P-3.

These rating actions follow Moody's recent upgrade of Oman's foreign and local currency country ceiling for bonds and bank deposits to Baa1/P-2 from Baa2/P-2. The outlook for the local and foreign currency deposit and debt ratings of all five banks is stable.

By the same action, Moody's has also changed the outlook on the D+ Financial Strength Rating (FSR) of BM from stable to positive, and on the D- FSR of NBO from negative to stable. The FSRs of OAB, OIB and AHB all carry stable outlooks and are unaffected by this action.

The upgrading of the deposit ratings for the five Omani banks and the senior unsecured debt rating of BM is based on the strong likelihood of support from the Omani authorities, should the need arise, combined with the improved capacity of the government to provide such support, as a result of the significant improvement in Oman's economic fundamentals over the past several years.

Moody's believes that the four commercial banks — BM, NBO, OAB and OIB — are all very important institutions for the domestic banking system, and that a possible failure of any of them would lead to a systemic crisis. For this reason these banks' deposit ratings are placed at the ceiling for such deposits in Oman.

Moody's believes that although AHB does not fall within the "too important to fail" category from a systemic perspective, the authorities would nevertheless provide support to the bank in the event of need, and thus a high degree of support is imputed in the ratings. However, we believe that such support might not be as timely or as certain as in the case of the larger commercial banks, resulting in the bank's ratings remaining one notch below the country ceiling for such deposits in Oman.

In the past, the Omani authorities have supported domestic banks in difficulty although there is no explicit guarantee to do so, and Moody's does not anticipate any change in that policy over the medium term. Nevertheless, any future upgrade of the rating ceiling for Omani bank deposits would not automatically result in a corresponding increase in any of the banks' ratings for deposits.

With respect to the local currency debt and deposit ratings, as well as senior unsecured debt ratings, Moody's notes that the respective ratings do not take into consideration Moody's Joint Default Analysis (JDA) methodology which has not yet been rolled out for deposit-taking institutions.

According to the rating agency, the banks' prominent role as deposit-takers, both in the local and interbank market, together with various degrees of government ownership, and their relative importance for their national economy would probably imply a very high level of support, particularly in the case of the commercial banks.

Consequently, higher ratings than those announced today could be envisaged for some Omani banks once JDA has been implemented for deposit-taking institutions.

The decision to change the outlook on BM's D+ FSR from stable to positive recognises the bank's substantially enhanced financial fundamentals over the past few years. Specific credit improvements include its growing recurring earning power, its improving asset quality underscored by declining levels of problem loans and rising loan loss reserves which more than fully cover non-performing loans, and moderately improved liquidity position.

An upgrade in BM's D+ FSR is likely to be heavily dependent on further improvements in the bank's liquidity position, as well as a continued trend of improving asset quality metrics. Further development in the domestic economic environment would also place upward pressure on the bank's FSR. At the same time, any significant deterioration in BM's financial fundamentals, particularly its asset quality, liquidity metrics or capital position, could lead to a lower FSR.

Moody's decision to change the outlook on NBO's D- FSR from negative to stable mainly reflects the bank's enhanced capital position following the injection of OMR44 million via a private placement by Commercial Bank of

Qatar (CBQ). The change in outlook further reflects our expectation that the new strategic shareholder, which now controls nearly 35% of NBO and has managerial control through a three-year management agreement, will materially improve the bank's credit risk profile through a combination of recoveries, write-offs and provisioning, as well as put in place the necessary risk management culture, policies and procedures to prevent a recurrence of such large-scale deterioration in the bank's credit quality. NBO's new CEO was previously with CBQ, which also has four seats on NBO's Board. Any upgrade in the bank's FSR will be highly dependent on substantial improvements in its asset quality, as well as on the specific strategy developed and implemented for the bank by its new management team. The ratings changes (by bank) are as follows:

Alliance Housing Bank: The long- and short-term foreign currency deposit ratings upgraded to Baa2/P-3 from Baa3/P-3. The long- and short-term local currency deposit ratings upgraded to Baa2/P-3 from Baa3/P-3. The D- financial strength rating remains unchanged.

BankMuscat: The long- and short-term foreign currency deposit ratings upgraded to Baa1/P-2 from Baa3/P-3. The long-term foreign currency senior unsecured rating upgraded to Baa1 from Baa3. The long-term local currency senior debt ratings upgraded to Baa1 from Baa3.

The outlook on the D+ financial strength rating changed from stable to positive.

National Bank of Oman: The long- and short-term foreign currency deposit ratings upgraded to Baa1/P-2 from Baa3/P-3. The outlook on the D- financial strength rating changed from negative to stable.

Oman Arab Bank: The long- and short-term foreign currency deposit ratings upgraded to Baa1/P-2 from Baa3/P-3. The D+ financial strength rating remains unchanged.

Oman International Bank: The long- and short-term foreign currency deposit ratings upgraded to Baa1/P-2 from Baa3/P-3.

The D financial strength rating remains unchanged.