CI Ratings has affirmed the Long- and Short-Term Ratings on the Oman National Scale of Alizz Islamic Bank at ‘omBBB-’ and ‘omA3’ respectively. Both ratings remain on a ‘Stable’ Outlook.
Given the relatively short history of Alizz Islamic Bank, some of the main supporting factors remain non-financial. These include strong shareholders, a strong and experienced management team, and well-developed policies and procedures.
An additional and important supporting factor is the close regulatory oversight by the Central Bank of Oman.
In financial terms, the main supporting factor at present is the substantial capital base, although the paid up capital continues to be eroded due to initial losses. Despite this, the capital adequacy ratio is strong and will be enhanced by the forthcoming OMR 30 million Perpetual Sukuk.
Although Alizz Islamic Bank (profile) remains in loss at the operating level, such losses are steadily decreasing and should be eliminated on a monthly basis by some point in Q4 this year, with the bank moving into regular profit at the operating level in 2018.
Alizz Islamic Bank is also moving towards a profit at the net level, however, the process will take longer because of the high level of provisions that continue to be taken. Thus, although profitability remains a constraining factor on the ratings, the degree is decreasing.
Asset quality remains very good and is a supporting factor for the ratings.
The Central Bank of Oman imposes mandatory general provisioning on all non-government financings. While the additional provision charges on new business is not a burden for a bank with a large (and already provided) existing portfolio, for a new bank like Alizz where financing growth is both rapid and from a low base, the burden is much heavier.
Alizz Islamic Bank’s improved financing based ratios are now a mildly supporting factor. However, the deposit base is still mainly corporate and there are therefore concentrations in both funding sources and the financing portfolio and this too is a constraining factor.
The proportion of retail funding is rising quite rapidly and this factor should therefore diminish as a constraint over time.
Finally, the main constraining factor on the ratings continues to be the short history of the Bank.
As a result, and despite the growth over 2015-17, the financing portfolio is still relatively small in money terms and still unseasoned in the sense that a large proportion will have been added in the last 12 months, and it is therefore not yet possible to ascertain likely asset quality trends – although the fact that there is still a very low level of non-performing financings is a major positive.
Given that asset quality is generally good in the Omani banking system and regulatory oversight is stringent, including in the area of asset quality, the likelihood of significant deterioration would appear limited.
An additional constraint (although more potential than actual at this point in Alizz’s development) is the effect of low oil prices on government revenues and liquidity in the Omani banking system.
As a newer participant with a still small market share, Alizz has been less impacted than the larger banks in terms of deposit mobilization, although it too has suffered from the effect on margins of higher than expected funding costs.
No upward pressure on the ratings is likely until such time as the Bank is solidly in the black at both the operating and net levels, with returns that approach those of the other Omani banks and the financing portfolio has become more seasoned.
At the current rating level for Alizz, the most recent reduction in CI Ratings’ Sovereign rating for Oman (‘BBB+’/‘A2’/‘Stable’) has not yet placed downward pressure on the Alizz international ratings, although ratings of some other banks have been lowered.
However, should the Sovereign rating be further lowered, some downward pressure on the ratings of all banks including Alizz may begin to be felt as such a reduction for the Sovereign would very probably indicate wider stress in the operating environment within Oman.
Alizz Islamic Bank was established in late 2012 and received its Islamic banking license in September 2013. As at end-April 2017, the Bank had eight branches. Another two branches will open later this year.
Capital Intelligence Ratings (CI Ratings) can be found at http://www.ciratings.com.