Dubai: Strong capitalisation, low levels of non-performing loans (NPLs) and sound liquidity buffers supported by stable deposit funding base makes Oman’s banking sector one of the strongest in the region according to analysts and Central Bank of Oman.
“We expect that NPLs will remain below 3 per cent of gross loans over the next 12-18 months. We base this primarily on Oman’s stable macroeconomic environment and our expectations that oil prices, which we track as a leading indicator for asset quality in this system, will remain relatively high and continue to support the government’s spending ability, underpinning corporate and retail repayment capacity,” said Khalid F. Howladar, vice-president, Senior Credit Officer at Moody’s.
Oman’s real gross domestic product (GDP) is projected to grow 4.3 per cent in 2014 with credit growth of around 10 per cent — 12 per cent in nominal terms. Omani banks are expected to maintain sound capital buffers over the next 12 to 18 months, as internal capital generation to largely match asset growth. With a system Tier 1 ratio of 12.6 per cent and a 130 per cent coverage of NPLs by loan-loss reserves as of September 20132, banks have sizable buffers to absorb unexpected losses.
The operating environment is widely seen as supportive of banks’ asset quality with NPLs remaining below three per cent of gross loans at year-end 2014. System-wide NPLs were 2.2 per cent of total loans in September 2013, unchanged from end-2011, while restructured loans — which are not classified as NPLs — represented an additional two per cent.
Omani banks also maintain a high coverage of NPLs by loan-loss reserves at 130 per cent in September 2013, which reflects regulatory requirements for banks to maintain general provisions of two per cent of gross loans on performing retail loans and one per cent on corporate loans, in addition to specific reserve requirements for problematic exposures.
“Omani banks’ asset-quality metrics compare favourably with those of the banks in GCC countries. This mainly reflects Oman’s stable operating environment with most banks’ operations focused in the domestic market. Although this introduces a level of borrower concentration in their loan books, banks have largely managed to avoid risks stemming from cross-border exposures,” said Elena Pnayiotou, assistant vice-president, Analyst at Moody’s.
Oman’s banking system is expected to remain primarily deposit-funded. Customer deposits amounted to 71 per cent of assets in September 2013, while 28 per cent of total assets were in the form of liquid assets.
Omani banks will maintain strong profitability in 2014, with net profits to average assets ranging between 1.5 per cent to 1.8 per cent. Total profit of commercial banks was RO 286.6 million (Dh2.7 billion) for the financial year 2013, which was up by seven per cent as compared to the total profit of RO 268.17 million of the previous year. At the end of end of December 2013, total banking assets stood at RO 22.354 billion, reporting an increase of 7.2 per cent on year on year basis.
Overall loan growth in the country is expected to gradually decline this year. “Lending growth is likely to gradually decline in 2014, as the Central Bank tightens its restrictions on retail lending,” said Timucin Engin, associate director, Financial Services Ratings, Standard & Poor’s Ratings Services.
Omani banks’ exposure to the construction and real-estate sector will remain a key source of credit risk. Aggregate exposures to the construction and real-estate sector represented 10 per cent of total loans at the end of September 2013.
Central bank optimistic
The ratio of bad to the total credit portfolio of the commercial banks has continued to decline through 2013 to reach 2.1 per cent at the end of September 2013 compared to 2.2 per cent at the end of December 2012. Hamoud Bin Sanjour Al Zedjali, executive president of the Central Bank of Oman (CBO) said in a statement to Oman News Agency (ONA), that these positive developments come amidst improved macroeconomic environment, as well as the effectiveness of the CBO regulatory systems on the commercial banks in terms of the credit control, debt classification based on risk and calculating the allowances for stumbling loans.