Global Investment House – Economic and strategic Outlook – Banking Sector– May 2008- Banking sector has done well in 2007 reflecting the banks’ earnings and their performance on the bourse. Financial Intermediation services including banking and insurance that saw negative growth of 7.1% in 6M-2007 produced a full year 2007 growth rate of 22.4%. The banks in the Sultanate constitute of 19 banks (6 local commercial banks, 10 foreign commercial banks and 3 specialized local banks) with a branch network of about 406 branches. All Omani banks operate under the supervision of the Central Bank of Oman (CBO), which is the sole regulator of the banking industry in the Sultanate.
Amongst other developments in Mar-07, the CBO decided to double the minimum capital requirement of new commercial banks to RO100m from RO50m, and to increase the minimum capital requirement of new branches of foreign banks to RO20m from RO10m. The minimum capital adequacy norms were recently reduced to 10% from 12%, which is above the BIS norm of 8%. Other regulations mandated by the CBO include:
• The cap imposed on personal loans was recently reduced from 42.5% to 40% of a bank's total lending, in addition to a new cap of 5% for housing loans which were formerly included in the 42.5% cap. Accordingly, the total cap on personal loan portfolio has been increased to 45% (40% for personal loans and 5% for housing loans).
• Lending ratio is capped at 87.5% of total funding base comprising customer deposits, subordinated loans, net borrowings from banks abroad as well as capital and reserves.
• The aggregate lending by banks to a person and/or corporation shall not exceed 15% of the net worth of the bank.
• The percentage of investments in bonds and equities was raised from 10% to 20% of net worth.
• Banks are not allowed to own more than 49% of any bank abroad, however they are allowed to operate branches abroad.
• In Mar-08, the CBO reduced the cap on interest rate from 9% to 8.5% effective beginning of Apr-08 on any fresh personal credit extended by the banks in Oman.
Consolidated Balance Sheets for Commercial Banks:
RO mn 2002 2003 2004 2005 2006 2007
Cash and deposits with CBO 166.7 133.7 167.8 140.3 248.9 666.7
Due from banks abroad 322.3 350.5 545.6 741.3 1,209.6 1,385.5
Total Credit 3,270.3 3,308.3 3,505.7 3,896.4 4,703.0 6,513.3
Credit to private sector 3,054.6 3,089.9 3,274.1 3,658.6 4,397.0 6,109.0
Credit to public enterprises 46.0 69.0 87.3 111.8 195.8 364.8
Credit to government 169.7 149.4 144.3 126.0 110.2 39.5
Securities 416.4 544.0 503.1 597.5 723.1 1,401.5
Treasury bills 69.0 138.0 149.0 6.0 - -
Government bonds 118.4 130.4 146.5 122.1 118.4 112.0
Other domestic securities 24.1 25.1 30.9 44.4 51.6 1,196.9
Foreign securities 85.9 83.4 121.7 154.8 302.5 92.6
Others 119.0 167.1 55.0 270.2 250.6 -
Fixed assets 36.9 36.6 35.4 37.4 36.5 50.2
Other assets 150.1 117.5 131.1 217.0 330.9 290.7
Total Assets / Liabilities 4,362.7 4,490.6 4,888.7 5,629.9 7,252.0 10,307.9
Total Deposits 2,777.2 2,852.6 3,078.3 3,761.5 4,684.9 6,488.4
Government deposits 276.4 299.9 441.4 543.5 676.5 912.7
Deposits of public enterprises 229.2 166.4 136.8 137.9 144.4 272.2
Deposits of private sector 2,271.6 2,386.3 2,500.1 3,080.1 3,864.0 5,303.5
Demand 523.2 594.4 625.8 854.1 894.3 1,539.5
Savings 588.6 667.4 757.5 876.7 1,035.4 1,448.2
Time 1,159.8 1,124.5 1,116.8 1,349.3 1,934.3 2,315.8
(of which in foreign currency) (321.0) (404.1) (433.2) (748.9) (1,191.4) -
Due to banks abroad 486.8 398.9 313.5 194.7 539.7 974.1
Core Capital and Reserves 432.8 548.7 587.3 781.7 900.0 1,251.1
Supplementary Capital 97.9 110.1 100.3 119.2 122.8 235.9
(of which general provisions) (5.0) (5.4) (22.7) (46.9) (60.5) -
Specific provisions and reserved interest 297.4 371.2 357.0 278.1 255.9 219.8
Other liabilities 270.6 209.1 452.3 494.7 748.6 1,138.6
Source: Central Bank of Oman
Owing to hyper growth on the real estate and industry fronts, bank credit increased by 38.5% to reach RO6.51bn in 2007 from RO4.7bn recorded in the previous year. As a result of budgetary surpluses, capital formation is at a new high with deposits of licensed banks increased by 38.5% to reach RO6.48bn in 2007 from RO4.68bn in 2006. The cumulative assets of Omani commercial banks increased at a CAGR of 18.8% during the period from 2002 to 2007. Credit to private sector constituted about 59.3% of the aggregate credit and the same had grown at a CAGR of 14.9% during 2002-‘07. The increased pace of growth in credit to the private sector reflects the active participation of the private sector in the economy and the government's commitment to open up the economy for privatization which is expected to continue gaining momentum going forward.
The majority of banks liabilities consisted of deposits that constituted 62.9% of total liabilities. Private sector deposits constituted 82% of total deposits and 51.5% of total liabilities in 2007. It recorded an all time high y-o-y growth rate of 37.3% in 2007 and had grown at a CAGR of 18.5% during 2002-’07. Time deposits constituted 44% of private sector deposits in 2007, while saving deposits accounted for 27% and demand deposits accounting for the remaining 29%. In view of booming real estate activities, credit off-take in Oman has expanded rapidly especially in the recent years, growing by 20.7% in 2006 and 38.5% in 2007. The CAGR of total credit off-take during the period 2002-07 was 14.8%.
Distribution of Commercial Bank Credit by Economic Sectors
RO mn 2004 2005 2006 2007
Import Trade 386.4 394.6 416.4 510.0
Export Trade 5.3 9.8 14.0 26.9
Wholesale and Retail Trade 146.2 193.5 202.4 238.5
Mining and Quarrying 99.7 109.0 188.1 396.7
Construction 222.8 256.0 274.5 376.3
Manufacturing 270.8 309.0 366.4 623.3
Electricity, Gas, and Water 115.6 160.5 172.4 176.0
Transport and Communication 45.4 44.9 65.5 55.5
Financial Institutions 164.3 201.9 234.0 278.3
Services 225.8 237.0 313.1 373.4
Personal Loans 1,344.4 1,482.7 1,824.6 2,600.0
Agriculture and Allied Activities 31.4 40.2 38.6 40.6
Government 144.3 126.0 110.2 39.5
Non-Resident Lending 50.2 43.1 49.6 167.9
All Others 253.1 288.2 433.2 610.7
Total Credit 3,505.7 3,896.4 4,703.0 6,513.3
Source: Central Bank of Oman
The mix of commercial bank credit reveals that personal loans contributed the most at around 39.9% of total credit facilities, manufacturing (9.6%), followed by import trade (7.8%), construction sector (5.8%) and services (5.7%). Asset growth is evident and so is the improvement in the quality of assets. Asset quality for all Omani banks improved significantly over the past couple of years on the back of strong macro-economic fundamentals. The analysis of asset quality of the five leading banks in the Omani banking sector indicates that AHB had the lowest gross NPL ratio and the highest coverage ratio among the five banks. Being mainly specialized in mortgage lending, AHB’s credit risk is minimized relative to other commercial banks since the bank has the right to take possession of the house in case of default. It is worth mentioning that over the past two years, NBO’s gross NPL ratio had been reduced significantly from 17.6% in 2005, to 11.3% in 2006 and to 7.7% in 2007. Similarly, coverage ratio for NBO improved from 81.2% in 2004 to 91.7% in 2007. In terms of profitability, most of the Omani banks are doing well lead by NBO followed by BM and BDOF.
Profitability of Omani Banks
RO mn 2005 2006 2007 y-o-y growth % 2007
AHB 4.4 3.9 2.2 -43.3%
BM 45.4 60.4 84.3 39.4%
BDOF 14.2 20.1 22.8 13.2%
NBO 20.3 30.4 44.6 46.6%
OIB 22.0 26.2 28.1 7.2%
Source: Company Reports, Zawya
The IMF expects the Omani economy to post a 5.2% growth in real GDP during 2008. With increasing opportunities being created as a result of highly vigorous real estate and manufacturing that are going to be the impeding growth drivers in 2008, we expect banks to benefit from this trend and beat the sequential growth in credit off-take posted historically until 2007. Also, the increased income levels and the predominantly young Omani population (about 65% or more below the age of 24) increase the prospects of the banks to lend more on the personal loans front.
© 2008 Al Bawaba (www.albawaba.com)
