Oman’s banks can be excused a sense of trepidation as they survey market conditions in 2018. With the smallest asset base in the GCC at just $81bn, Omani banks are already more exposed than most to adverse economic headwinds.

Recent performance levels have been generally underwhelming. Profit reporting for full-year 2017 revealed a set of flat results for the largest Omani banks. Bank Muscat, the biggest lender, posted net profits of RO176.8m ($460m) for 2017, just 0.1 per cent higher than the year earlier period. Similar performances were seen for Ahli Bank, while National Bank of Oman (NBO) saw profits fall by more than RO11m ($28.6m) to RO55.8m ($145.1m). One of the few Omani banks to show strong net income growth was Bank Sohar, which revealed a 32 per cent increase in net profit to RO25.33m ($65.9m).

The weak state of the public finances could limit the sovereign’s capacity to support banks this year. What is more, slower economic growth means rising levels of problem loans. These are issues that Omani bankers could do without as they reel from the impact of a slate of ratings downgrades administered last year.

Oman’s economy remains vulnerable as a result of lower oil prices, due to a higher breakeven oil price and a higher fiscal deficit. Oman’s public debt to GDP ratio is expected to pass the 50 per cent mark this year. In 2014, it was just 5 per cent.

Ratings downgrades

In December 2017, Fitch Ratings downgraded five Omani banks, giving Bank Muscat, HSBC Bank Oman, Ahli Bank, Bank Dhofar and Bank Sohar negative outlooks, as well as affirming the negative outlook of NBO.

According to Redmond Ramsdale, head of GCC sovereign ratings at Fitch, the downgrade of the banks reflects a combination of weaker financial flexibility of Oman to support its banking system as a result of a significant deterioration in public finances, and constraints of the domestic operating environment on the banks and significant links between the banks and the sovereign.

Non-performing loans

Weaker economic growth is expected to lead to a rise of non-performing loans – albeit from a low starting point of 2 per cent of total loans in 2017.

“There has been mild asset-quality deterioration in 2016 and 2017 due to pressure in retail, oil and gas, and real-estate sectors. This is expected to continue,” says Ramsdale. “Concentration risk remains high by sector and single name. Household indebtedness is also significant and measures have been introduced by the central bank to moderate this.”

Chinese loan

Despite the downgrades, Oman’s sovereign still managed to get a large syndicated loan from Chinese banks off the ground. In July 2018, the government raised $3.55bn through a loan from a group of Chinese financial institutions. The transaction was increased from an initial target of $2bn due to strong interest.

Year ahead

Omani banks’ lending activities will nonetheless likely remain subdued this year. Credit to the private sector increased by 6.5 per cent to RO21bn ($54.6bn) in 2017, according to Central Bank of Oman figures. Credit growth is expected to be in the mid-single digits in 2018, a reduction from about 10 per cent in 2015 and 2016, says Ramsdale.

Omani banks will continue to maintain sound profitability metrics and impairment charges should remain reasonable. “Banks are well placed for interest rate rises, expected in line with the Fed rate rises, as the banks hold large portions of CASA [current and savings account] deposits, which do not significantly reprice,” says Ramsdale.

Infrastructure investments

One potential bright spot is the project finance market. The government is supporting several infrastructure investments, and more deals should come to market that could provide lending opportunities for local lenders. Last year, state-owned Salalah Methanol Company announced financial close on a new ammonia unit to be built at its existing methanol plant near the southern port city of Salalah. It negotiated a 12-year, $728m recourse project finance facility, tapping a mix of international and local banks. Of the $728m raised, more than half – $443m – will finance the ammonia project and the remainder will refinance existing debt.

The state-owned Oman Gas Company is meanwhile reported to be seeking to arrange a bridge loan of more than $1bn with a group of banks that will then later be refinanced via a US dollar bond issue.

Sukuk programmes

New debt issuance, off both conventional and Islamic flavours, will also increasingly come into play for local lenders. In February 2018, Omani conglomerate Golden Group listed its first sale of Islamic debt instruments – a five-year sukuk raising RO50m ($130m). Golden established an RO200m ($520m) sukuk programme in 2017, reflecting growing appetite for Islamic financing in the sultanate. Bank Dhofar’s Islamic banking arm acted as lead manager on Oman’s largest-ever corporate sukuk.

Other Islamic arms of Omani banks have been active. Bank Muscat’s Islamic banking arm Meethaq last October launched Accelerate SME, a digital portal to help startups and small and medium-sized enterprises gain access to business resources and funding opportunities.

Such moves underline that despite the adverse conditions for Omani lenders, there are still opportunities to secure new revenue streams. The overall sector outlook may be challenging, but the sultanate’s banks are not about to hide their light under a bushel.

Oman market focus in features:

Brief: Oman’s diversification drive introduces new challenges
Government: Oman walks domestic and regional tightrope
Economy: Muscat continues its search for economic stability
Banking: Omani banks face ongoing pressure amid weak growth
Construction: Mixed results for Oman’s construction sector
Oil & Gas: Driving the use of local contractors in Oman
Power: Muscat looks to strengthen energy diversification
Transport: New airport fuels Oman’s logistics ambitions
Databank: April 2018
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