BKDB's financial strength rating upgraded to 'BBB+'

Capital Intelligence (CI), the international credit rating agency, today announced that it has upgraded Bank Dhofar's (BD) Financial Strength Rating to 'BBB+', in view of the Bank's good and improved asset quality, sound capital adequacy and good operating profitability.

The Bank's Long-Term and Short-Term Foreign Currency Ratings are maintained at 'BBB+' and 'A2' respectively, with a Support Rating of '3'. The ratings are underpinned by the high likelihood of support from the government and the Bank's good financials. A 'Stable' Outlook is maintained for all the ratings. The Bank expects to benefit from the upturn in economic activity in Oman in 2012, as well as a return to good profitability. BD's small size is a key factor constraining the ratings.

BD suffered a setback in its performance in 2011 due to an unfavourable judgement in a case filed against it by one of the other local banks in the country. This led to BD having to pay a sizeable amount to a local court, which was charged to the profit and loss statement. BD has since won a favourable ruling by two courts and it is likely that the amount paid to the lower court will be returned, though it is difficult to estimate the time frame. If it were not for this extraordinary charge, net profit and return on average assets (ROAA) would have been higher than in 2010 as BD's main businesses continue to be profitable. Operating profitability declined in 2011, as BD's hitherto very high interest differential (as compared to peers) fell due to pressure on lending margins - even as non-interest revenues picked up in 2011. Operating costs were also up due to higher staff costs, new branches and increased automation expenses, and these were partly responsible for the Bank's lower operating profitability in 2011. Total impairment charges were somewhat lower in 2011, reflecting an improvement in asset quality.

Asset quality ratios strengthened last year, partly due to a satisfactory macroeconomic environment. BD's non-performing loans (NPLs) to gross loans ratio is among the best in the industry. NPLs declined as a percentage of total loans and were more than fully covered by provisions. BD continued to be well capitalised and liquidity ratios remained at satisfactory levels, improving marginally at end 2011, although they remain tighter than the peer group average.

The Bank commenced operations in January 1990 and is owned 27.5% by an investment company, the Dhofar International Development and Investment Holding Company (DIDIC). BD is a full-scale commercial bank offering a wide variety of retail and corporate banking services. Retail banking activities make a significant contribution to the Bank's operating profit, but income from corporate banking activities is also substantial. The Bank's principal business groups are Wholesale Banking, Consumer Banking, and Treasury.