Fitch Ratings has placed
The 'bb+' Shareholder Support Rating (SSR) has also been placed on RWN.
The rating action follows the
The RWN on the SSR and IDR reflects that upon completion of the merger, Fitch will cease to factor potential support from
Key Rating Drivers
HBON's IDRs are driven by potential support from the bank's ultimate parent,
HBON's VR reflects its adequate franchise and business model, benefiting from its links with
Shareholder Support Rating of 'bb+':
Improved Operating Conditions: Fitch revised its assessment of the Omani banks' operating environment score to 'bb' from 'bb-' following the Omani sovereign upgrade in
Adequate Business Profile: HBON's business profile incorporates benefits from being part of the
Conservative Risk Profile: Fitch's overall assessment of the bank's risk profile considers cautious loan growth, good reporting and appropriate risk control tools, which mitigate risks associated with high levels of concentration.
Sound Asset Quality: HBON's Stage 3 loans ratio of 3.4% at end-2022 (end-2021: 3.2%) was one of the lowest in the sector, while reserve coverage is consistently maintained above 100% (end-2022: 115%). Non-loan assets, which were about 44% of HBON's end-2022 total assets, are of good quality in the local context, comprising Omani government securities, cash and placements with highly-rated banks.
Sound Profitability but Below Peers': HBON's profitability rebounded strongly in 2022 with net income up 46% vs. 2021 owing to 10% growth in operating income, lower operating expenses, and releases of expected credit loss provisions. However, through the cycle profitability (the operating profit to risk-weighted assets ratio has averaged 1.3% in the last four years) remains lower than larger peers due to a higher proportion of lower-yielding non-loan assets and a higher cost structure, although it has improved over the past three years.
Sound Capitalisation: The bank's common equity Tier 1 (CET1) ratio (24.1% at end-2022) is the highest in the sector, benefiting from a larger share of total assets in the form of securities with low risk weighting and sound internal capital generation. HBON's CET1 minimum requirement of 8.25% provides a sizeable buffer to absorb asset quality shocks or declining collateral values.
Stable Funding; Strong Liquidity: Stable customer deposits account for a high proportion of total funding (end-2022: 97%), with 67% low cost current accounts and savings accounts. Liquidity is strong with a liquidity coverage ratio and a net stable funding ratio of 442% and 167%, respectively, at end-2022.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
HBON's Long-Term IDR, SSR and VR could be downgraded and withdrawn upon the completion of the merger with SIB as the bank will cease to exist as a legal entity.
A downgrade of
HBON's VR is sensitive to a combination of material weakening of its asset quality metrics (with the Stage 3 ratio increasing above 5%) together with weaker capital ratios (with the CET1 ratio falling below 12%). A funding stress, in the form of large government deposits exiting the banking system and materially affecting HBON's liquidity profile, could also be negative for the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of
Positive rating action on HBON's VR is unlikely given the RWN.
HBON's IDRs, SSR and VR could be affirmed if the merger does not go ahead.
VR ADJUSTMENTS
The operating environment score of 'bb' has been assigned below the 'bbb' category implied score for
The business profile score of 'bb-' has been assigned above the 'b' category implied score due to the following reason: group benefits and risks (positive).
The earnings and profitability score of 'b+' has been assigned below the 'bb' category implied score due to the following reason: earnings stability (negative).
The capitalisation and leverage score of 'bb' has been assigned below the 'bbb' category implied score due to the following reason: risk profile and business model (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
HBON's IDRs are linked to HSBCs and indirectly to the sovereign rating.
ESG Considerations
The highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on HBON, either due to their nature or to the way in which they are being managed by HBON. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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