The OER-Gulf Baader Capital Markets survey of the Best Banks in Oman 2012 shows how ‏strong fundamentals and high hydrocarbon prices ensured a strong performance by the Sultanate's banking sector in 2012

Strong GDP growth and supportive monetary and fiscal policies had a favourable impact on business growth and performance of commercial banks in 2012. Oman's banking system remained sound, resilient and profitable in 2012. Total assets of commercial banks increased by 15.3 per cent to RO20,681.4mn in November 2012 compared to RO17,934.2mn in November 2011. Total credit expanded by 16 per cent to RO14,333.6mn at the end of November 2012 from RO12,354.4mn a year ago. While credit to government declined by 8.2 per cent at the end of November 2012, credit to public enterprises and private sector increased by 15.6 per cent and 17.1 per cent, respectively.

‏Commercial banks' overall investments in securities increased by 76.2 per cent to RO 2,202.1mn in November 2012 from RO 1,249.8mn a year ago. Of the total outstanding investments, commercial banks' investments in CBO CDs stood higher at RO 1,022mn in November 2012. ‏Investments in Government development bonds (GDBs) increased by 52.2 per cent to RO 432.8mn in November 2012 compared to its level last year. Commercial banks' investments in foreign securities increased to RO549.4mn in November 2012 from ‏RO223.1mn a year ago. On the liabilities side of the balance sheet, total deposits of commercial banks increased by 15.1 per cent to RO14,136.4mn in November 2012 from RO 12,282.7mn in November 2011.

Private sector deposits with commercial banks increased by 13.3 per cent to RO 9,032.8mn in November 2012 from RO 7,974mn a year ago. Government deposits with commercial banks increased by 26.9 per cent to RO3,901.1mn, while deposits of public enterprises declined by 8.6 per cent to RO 979.9mn during the same period. ‏The provisional net profits of commercial banks stood higher at RO 272.1mn at the end of November 2012 compared to RO235.5mn at the end of November 2011. Broad money (M2) increased by 11 per cent to RO 10,956.4mn in November 2012 compared to RO 9,874.8mn in November 2011.

Narrow money (M1), comprising currency held by the public and local currency demand deposits, expanded by 14.7 per cent to RO3,680.6mn at the end of November 2012 on a year-on-year basis. Quasi money (comprising RO savings and time deposits, certificates of deposit issued by commercial banks, margin deposits and foreign currency denominated deposits) increased by 9.1 per cent to RO 7,275.8mn in November 2012 compared to ‏RO6,666.1mn in the previous year.

As regards the sources of broad money supply, net foreign assets of the banking system including CBO increased by 10.9 per cent to RO6,125.8mn in November 2012 from RO 5,523.1mn in November 2011, while domestic assets rose by 11 per cent to RO4,830.6mn from RO4,351.7mn during the same period. ‏Omani banks are expected to report higher profits in 2013 and likely to grow more aggressively as they compete for market share, Fitch Ratings said in a report.

In its 2013 outlook for GCC banks, the ratings agency said that the outlook for Omani banks remained stable this year.

‏"To date, Omani banks have achieved modest profitability due to a cautious growth strategy, but they are likely to grow more aggressively as they compete for market share now," Fitch said. ‏According to Fitch, competition is likely to increase with the launch of Islamic banks and windows, which should generate some new business for both existing banks and new entrants.

‏"Margins are likely to tighten due to increased competition, CBO-imposed interest rate caps on retail lending and slimmer margins on government-related business," it said. ‏The ratings agency said that the cost of funding was likely to increase in Oman due to competition for deposits and increased wholesale funding, unless this is offset by higher volumes of non-remunerated Islamic deposits. It added that fee incomes could improve, linked to increased trade finance and guarantee issuance.

Fitch said that asset-quality concerns, particularly relating to the domestic real-estate sector, still weighed on the viability ratings of Omani banks. ‏"Non-performing loans (NPL) ratios at some banks are relatively higher - although this has always been the case, reflecting write-off policies and significant interest in suspense - while concentration risk is also high in Oman due to the limited size of the corporate market. Household indebtedness is also significant, and measures have been introduced by the CBO to moderate this."

It said that loan-to-deposit ratios are unlikely to improve in 2013, adding that banks were adequately capitalised and that it does not expect capital to be a concern in 2013. ‏"Customer deposits would grow, but overall liquidity remains tight with the banks. Despite improving confidence about Oman, Fitch believes that access to international wholesale funding will be expensive, partly reflecting the modest ratings of Omani banks compared with other GCC banks," Fitch added.

 

‏Future outlook

The outlook for Oman's banking system remains stable, says Moody's Investors Service in a February 2013 report titled 'Banking System Outlook.' The outlook is unchanged from 2007 and reflects (1) Oman's supportive macroeconomic environment; (2) low and well-provisioned for non-performing loans (NPLs); and (3) ample liquidity buffers, underpinned by a stable deposit funding base. ‏These positive factors continue to be balanced by structural weaknesses related to the banks' dependence on the small, undiversified Omani economy, which is heavily reliant on the hydrocarbon sector, and the presence of significant funding and borrower concentrations.

Moody's expects Oman's real GDP to expand by 4.1 per cent in 2013, fuelled by high oil prices and public spending, which will stimulate the non-oil economy and positively affect the banking sector over the 12-18 month outlook period. Oman's stable macroeconomic conditions will create lending opportunities for banks and support credit growth of around 10 to 12 per cent in nominal terms in 2013. However, whilst Moody's expects the operating environment to be supportive over the outlook period, the rating agency also recognises that Omani banks will remain reliant on the small local economy and the performance of the hydrocarbon sector (which accounted for over 50 per cent of GDP in 2012), leaving the banks vulnerable to the risk -- although unlikely -- of a sustained drop in oil prices.

The banks' NPL levels will remain low, at around three per cent of gross loans over the outlook period. Moody's bases this on (1) Oman's stable macroeconomic environment; (2) improved labour market conditions, buoyed by government spending creating jobs; and (3) regulations introduced by the Central Bank of Oman during 2012, linking maximum retail loan amounts to salary levels. However, Moody's expectations of solid asset-quality performance are counterbalanced by banks' asset exposure to event risks, given their high single-party exposures, and a still-problematic real-estate sector where delinquencies remain well above the sector average.

According to Moody's, the system will remain primarily deposit-funded, with customer deposits accounting for 86 per cent of the total funding or 72 per cent of assets as of September 2012, whilst the banks will continue to benefit from a high level of deposits from government and government-related entities. The system will also likely maintain sound liquidity buffers, with liquid assets -- defined as cash, interbank balances and liquid securities -- amounting to 26 per cent of total assets in September 2012. Nonetheless, Moody's also expects that the high concentrations in the banks' deposit bases will continue to leave the banks vulnerable to large deposit withdrawals over the next 12-18 months. ‏With the proposed increase in spending by the government on infrastructure to boost opportunities for the banking sector, prospects for Omani growth are sound. GDP growth of around five per cent is expected for 2012, aided by increased hydrocarbon revenue and government sector is expected to grow to six per cent. ‏Major projects in progress in Oman include a rail network and new air and sea ports. In addition, the Sohar and Duqm industrial areas are expected to see a burst of activity in the petro- chemicals, oil-refining, metals and other industrial sectors as investments worth billions of dollars get underway.

The banking sector expects lending opportunities in the consumer segment to rise, given the substantial increase in salaries for public sector employees announced by the government since 2011 and new job creation for Omanis. Local banks rely heavily on revenues from consumer lending (capped by the central bank at 40 per cent of loans).

Unlike the central bank in the UAE, the Omani central bank has not interfered so far in setting maximum loan values (as salary multiples), debt to income ratios or maximum loan tenors. However, rising levels of personal indebtedness has prompted the central bank to encourage local banks to set more conservative lending criteria. This could reduce the consumer loan growth rates of local banks.

Omani banks have little exposure to the Eurozone. Moreover, with about 80 per cent of Oman's oil-dominated exports going to Asia, the impact of the European crisis is limited as long as it does not lead to a significant fall in oil prices. However, the problems in the Eurozone have impacted the availability of overseas funding for the banking sector. ‏Oman's banking sector did well in 2012 in terms of asset growth due to higher lending to support increased economic activity, and the sector is poised for strong growth during 2013, thanks to the key emphasis on infrastructure development in the new budget.

Given the continuing high oil prices coupled with the positive macro-economic conditions, the overall credit off take in Oman's banking sector is expected at be 10 to 12 per cent levels, amid robust Government projects spending in the pipeline and the anticipated recovery in private sector credit off take. 

© Oman Economic Review 2013