Omani banks get another fillip |
Oman Daily Observer - 12 May, 2012
The Omani banking industry continues to remain sound, resilient and profitable. This has once again been ascertained by Moody's Investors Service, with the international body assigning stable outlook for the Omani banks.
“The outlook on Oman's banking system remains stable, reflecting the country's benign operating environment, which is underpinned by high oil prices and increased government spending”, says Moody's Investors Service in a new Banking System Outlook published last week. Oman’s financial system is dominated by banks which account for more than 90 per cent of total assets and liabilities of the financial sector as a whole. The combined balance sheet of commercial banks exhibited healthy growth in all major banking aggregates.
The stable outlook also captures the banks' sound asset quality, strong revenue-generating capacity and solid capital buffers.
Total assets of commercial banks increased by 22.2 per cent to RO 19,029.9 million in March 2012 compared to RO 15,578.9 million in the same period last year. Cash on hand and deposits of commercial banks with the CBO stood lower at RO 1,108.0 million at the end of March 2012.
“The favourable operating environment will continue to support Omani banks' lending growth and profitability, and sustain their solid funding bases over the next 12-18-months”, adds Moody’s.
At the same time, the rating agency also takes account of the structural weaknesses related to the banks' high dependence on the small undiversified Omani economy, which is reliant on hydrocarbon-sector performance, and
the high borrower concentrations that expose banks to event risk.
While credit to government declined by 51 per cent in February 2012 reflecting revenue surplus arising out of higher realisation of international crude oil prices, credit to public enterprises and the private sector increased by 47.6 per cent and 15 per cent, respectively.
On a year-on-year basis, total credit expanded by 19.7 per cent to RO 13,141.4 million at the end of March 2012 and accounted for 69.1 per cent of total assets.
While credit to Government declined by 23.4 per cent in March 2012 reflecting revenue surplus arising out of higher realisation of crude oil prices, credit to public
enterprises and the private sector increased by 53.8 per cent and 16.3 per cent, respectively.
The banking industry around the world has been passing through a critical phase since 2008. Most of the banks and financial institutions, particularly in the western countries, were busy inrepairing their balance sheets, infusing capital, and recovering from the state of credit crunch.
Despite the government's long-term plans to foster economic diversification, Moody's recognises that Omani banks will remain dependent on the performance of the hydrocarbon sector (which accounted for over 50 per cent of GDP in 2011), leaving banks' financial performance susceptible to oil-price volatility.
Uncertainties regarding regional political developments also pose tail risks. With a Tier 1 ratio of 12 per cent as of December 2011, the Omani banking system has sufficient capital buffers to absorb expected credit losses under Moody's scenario analysis, which considers the impact of a significant drop in oil prices and a reduction in the fiscal stimulus. Over the next 12-18 months, non-performing loans (NPLs) will likely stabilise at around 2.5 per cent-3 per cent of total loans, owing to Oman's favourable macroeconomic conditions and labour market trends.
At the same time, however, Moody's acknowledges that asset-quality metrics will remain exposed to event risk given the concentrated nature of private wealth in Oman and the high single-party exposures in the banks' loan portfolios.
The system maintains sound liquidity buffers, with liquid assets amounting to 26 per cent of total assets in December 2011.
Over the outlook period, Moody's expects that the deposit-funded system will continue to benefit from strong ties with the Omani government, which contributed around 35 per cent of the sector's deposits at the end of 2011.
“Whilst deposit concentrations will continue to represent a structural challenge, high deposit balances from the Omani government and quasi government entities have been a source of funding stability in recent years”, the report says.
The sector's earnings-generating capabilities are strong, with the ratio of pre-provision earnings to average assets likely to remain around the historic 2.5 per cent-2.7 per cent range in 2012. Moody's expects that the system's overall profitability will remain at comfortable levels, supported by higher lending volumes, manageable provisioning requirements and the country's low-tax regime.
Commercial banks’ overall investments in securities increased significantly by 55.4 per cent to RO 2,034 million in March 2012 from RO 1,308.7 million a year ago.
Of the total outstanding investments, commercial banks’ investments in CBO CDs increased by 57.8 per cent to RO 1,114 million in March 2012 from RO 706 million a year ago.
Investments in government development bonds (GDBs) increased by 40 per cent to RO 400.2 million in March 2012 compared to its level last year, reflecting new issues of five-year GDBs by the Ministry of Finance in December 2011. Commercial banks’ investments in foreign securities increased to RO 367.9 million in March 2012 from RO 154.2 million during the same period last year.