Muscat - Global credit ratings agency Moody's has said that the Central Bank of Oman's (CBO) new guidelines on credit exposure to non-residents and placement of bank funds abroad are credit positive for banks' asset quality and profitability.
The CBO had, last week, issued a circular imposing new limits on Omani banks' cross-border lending and interbank placements.
"Given the higher credit risks that Omani banks assume outside of Oman, where delinquencies are raising credit-loss ratios, we consider the new requirements credit positive for banks' asset quality and profitability. The new caps will help ring-fence domestic banks from risks stemming from their cross-border exposures and will reduce credit costs, which will improve banks' profitability," Moody's said in its Issuer Comment report released on Monday.
The CBO's new requirements apply to all licensed banks operating in Oman. Banks have until September 30 to comply with the new requirements.
Moody's said that the CBO circular caps Omani banks' aggregate (on- and off-balance sheet) credit exposures to overseas borrowers (including banks) at 100 per cent of equity and 120 per cent inclusive of interbank placements. Also, if the overseas exposures are in countries rated below investment grade, the cap is 15 per cent of capital, with a cap of five per cent on a single country.
"We expect better asset quality as banks' underwriting standards will tighten to limit risks through exposures in countries where the banks lack local knowledge and expertise," it said.
Moody's said that the published bank data show that although cross-border exposures are small (at around four per cent of overall lending), banks' problematic exposures outside Oman are considerably higher than problem exposures in their home market, where the banks maintain low levels of non-performing loans (NPLs).
"We estimate that for the five rated Omani banks, the NPL ratio outside Oman was 6.2 per cent at the end of 2013, versus an overall NPL ratio of 2.4 per cent. The higher delinquencies mainly stem from credit exposures in the Middle East and Africa, and certain legacy exposures in other regions."
Moody's also said that for the rated Omani banks the provisioning expense to total loans outside Oman was 1.6 per cent in 2013, compared with an overall (ie, domestic and foreign operations) ratio of 0.7 per cent in 2013.
The ratings agency expects Bank Muscat to be most affected because it has the largest cross-border exposures among Omani banks through lending and interbank placements. "Although the bank can meet the new aggregate limits, the bank's exposure to countries that are below-investment-grade or un-rated is slightly above the 15 per cent limit, and thus Bank Muscat will need to reduce its exposures to comply with the new requirement," Moody's said.
"Conversely, BankDhofar and Oman Arab Bank are domestically focused and have the lowest exposures outside Oman among the banks we rate. As such, they will not be materially affected by the new caps," it added.
© Muscat Daily 2014
