Outlook for Oman’s banking system is stable - Moody's
The positives include (i) Oman's improved operating environment; (ii) banks' solid capitalisation under Moody's base-case and stress-case scenarios; (iii) stable funding bases and high liquidity buffers; (iv) low levels of non-performing loans (NPLs); and (v) Moody's expectation of adequate earnings, despite higher operating costs. The negative factors affecting Omani banks are continued high credit risks due to single-party exposures, as well as the banks' limited geographic diversification and high reliance on the oil-dependent domestic economy.
The outlook expresses Moody's expectations for the fundamental credit conditions in this sector over the next 12-18 months.
"We forecast that Oman's real GDP will likely to expand by 2.9 per cent in 2011, fuelled by high oil prices and increased oil production, whilst accelerated public spending will also stimulate economic growth outside the oil sector," said Elena Panayiotou, a Moody's analyst and author of the report.
"The improved operating environment will support banks' asset quality, drive credit growth – likely to be between 10-15 per cent over the outlook horizon – and increase bank revenues. Moreover, non-performing loans will likely remain at low levels over the outlook period, at 3%-4% of total loans," said Ms Panayiotou.
The stable outlook is also underpinned by the sector's solid capitalisation buffers. The system had a combined Tier 1 ratio of 13 per cent as of December 2010, a sufficient cushion to absorb expected credit losses under Moody's base-case and stress-case scenarios.
The banks' earnings-generating capabilities are adequate, with pre-provision earnings to average assets likely to approximate 2.5 per cent during 2011. Profitability will likely be supported by healthy interest margins, moderate credit growth, low provisioning requirements and an efficient cost base, despite rising staff costs.
"In our view, liquidity reserves are significant, with liquid assets amounting to 25 per cent of total assets. The deposit-funded system will continue to benefit from strong ties with the Omani government, which contributes around 30% of sector deposits, forming a stable, although concentrated, funding source," said Ms Panayiotou.
However, Moody's also notes that credit risk remains high, due to the elevated single-party exposures (the top 20 loans are around 150-200 per cent of banks' Tier 1), and exposures to the construction and real-estate sector, which is showing signs of distress. In addition, the concentrated nature of private wealth in Oman and the small size of the banking system ($41 billion at end-2010) raises the risk of contagion between banks in case of a corporate default, because large private and corporate customers typically have exposures to several banks within the system.
In addition, a key structural weakness is Omani banks' limited geographic diversification and high dependence on the domestic economy, which in turn relies on the volatile oil sector. Despite the government's long-term plans to diversify the economy, the hydrocarbon sector will continue to dominate the Omani economy over the medium term, leaving banks' earnings susceptible to volatility.
- GGC food consumption â€کto top 3pc growthâ€™
- DNO International enters into a farm-in deal on Oman's Block 36
- Cobra bares fangs to sting 23 banks & insurance firms
- Moody's outlook for Omani banks remains stable
- Moody’s assigns NBK a stable outlook and financial strength of “C” on the back of a weakening operating environment in Kuwait