Mubasher: The proposed merger between Bank Dhofar and Bank Sohar will bring long-term benefits with an overall positive impact on Dhofar's credit profile, according to a report published by Moody's Investors Service.

However, such merger will generate short-term implementation challenges due to the weak operating environment.

"The lower oil prices have negatively affected macroeconomic environment and investor confidence in Oman, creating challenging conditions for the banks," Mik Kabeya, analyst at Moody's, noted.

“Following three years of negotiations, the agreement of a share swap ratio on 8 June 2016 between Dhofar and the Board of Directors of Sohar suggests that the banks could conclude the merger before year-end,” the report highlighted.

Merger implementation costs as well as Sohar's weakening profitability will negatively affect the combined entity's profitability metrics over the medium term, according to the rating agency.

On the other hand, Moody's noted that “the merger would increase the bank's importance to the national economy and to the functioning of the domestic financial system - the combined bank will exhibit a market share of deposits of 21%, from 14% for Dhofar as of the first quarter of 2016”.