NFCI Initial Rating on the Oman National Scale of BBB Assigned

05/10/2017 19:35 AST

Capital Intelligence Ratings (CI Ratings, the international credit rating agency, today announced that it has assigned initial Corporate Ratings on the Oman National Scale of 'omBBB' Long-Term and 'omA3' Short-Term to National Finance Company S.A.O.G. The Outlook on the ratings is 'Stable'. The ratings are supported by the reasonably well capitalised balance sheet and by the consistently good returns achieved over time. Although leverage may rise if business volumes grow, it is expected to remain in a range that is considered comfortable for a non-bank financing company (NBFC). Asset quality is also a supporting factor, given close to full loan loss reserve coverage and the satisfactory effective coverage ratio.

The main constraining factors on the rating at present are size and funding base, although liquidity is satisfactory for the industry and the size factor will greatly diminish in importance following the merger with Oman Orix Leasing Company (OOL) later this year. Funding limitations are inherent in the business model given regulatory barriers, as is the concentration on auto loans in the consumer segment. The difficult operating environment due to financial pressures on the Omani government also weighs on the rating.

Once the OOL merger has been completed the combined company should be in a considerably stronger position, given the much larger market share of the combined entity. National Finance Co. has a good position in the Omani finance market, with a good brand and national coverage via its branch offices. OOL is of similar size, although a little smaller, and together the combined entity will be by some way the largest NBFC in Oman. Offsetting these pluses, however, are the difficult economic conditions in Oman; these mean that asset quality is likely to come under pressure for all lenders, and this could become a constraining factor on the rating in the future.

The fall in oil prices has also had a major negative impact on liquidity conditions in Oman. Lower government spending (and delays in payments to some suppliers and contractors) has, in particular, impacted asset quality in the contracting sector and in the supply chain to that sector. In contrast, the consumer segment has been more resilient, especially those Omanis employed by the government or leading corporates. However, consumers have become much more cautious - especially when it comes to large ticket items such as cars - although the Company has nonetheless been able to keep growing its retail portfolio.

The outlook for lending to corporates is less clear. Management has prudently been tightening underwriting standards in general and seeking to lower exposure to stressed sectors in particular. The Company expects growth in financing to be muted this year ahead of the merger. Following that, in 2018 there will inevitably be a restructuring period as internal structures are aligned - which is likely to mean that financing growth will continue to be moderate. This should, however, have the benefit of ensuring that leverage remains at comfortable levels - or even possibly decline if asset growth is more muted than is currently expected.

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