Banks in the Sultanate of Oman (A-/Stable/A-2) enjoy good profitability despite concentration risks and funding profile weaknesses, said Standard & Poor's Ratings Services in a report published today titled "Bank Industry Risk Analysis: Oman (Sultanate of)."
The Omani banking system is the smallest in the Gulf. Comprised of 17 banks, it had total assets of Omani rial (OMR) 6.1 billion ($15.9 billion at OMR0.385 to $1) at June 30, 2006.
"The five locally incorporated commercial banks dominate the system, with the top three commercial banks alone representing about two-thirds of system assets and loans," said Standard & Poor's credit analyst Emmanuel Volland.
Omani banks enjoy good profitability and capitalization as a result of the supportive economic conditions that have prevailed during the past four years. The supportive economy has also boosted banks' asset quality
"Our assessment of the Omani banking system takes into account the government's interventionist approach toward domestic banks as well as banks' continuously improving financial profiles during the past four years," said Mr. Volland.
Several factors weigh on Omani banks' risk profiles, however. The lack of economic diversification in Oman, the dominance of a few merchant families, and a preponderance of single-name lending have resulted in relatively high credit concentrations. The Omani banking system also holds large exposures to the highly leveraged personal sector, as consumer lending represented almost 38% of banks' outstanding credits at year-end 2005. In addition, banks remain small by regional standards, and do not have the critical size to finance large government projects.
Asset quality has been constantly improving during the past couple of years, but the funding profile of Omani banks remains relatively weak compared with that of banks in other Gulf countries. Indeed, over the past five years, loans have been expanding more rapidly than deposits. In addition, deposits are predominantly short term while the maturity profile of loans is lengthening, which heightens asset and liability mismatches. Banks are expected to address this issue through the issuance of long-term debt.