The outlook for Oman's banking system remains stable, as it has been since 2007, Moody's Investors Service said in a new report. The stable outlook primarily reflects the rating agency's expectations of stable macroeconomic conditions that will support low levels of non-performing loans (NPLs) and healthy levels of capitalisation and earnings. In addition, sound liquidity buffers, supported by a stable deposit funding base also underpin the stable outlook.
These supportive factors will continue to offset potential shocks from an unexpected drop in oil prices and risks stemming from high borrower concentrations, opacity surrounding local conglomerates and real-estate sector exposures.
Moody's expects Oman's real GDP to expand by 4.3% in 2014. Relatively high oil prices will fuel the government's ability to increase spending, stimulating the non-oil segments of the economy and the banking sector over the 12-18 month outlook period. Moody's says that stable macroeconomic conditions will lead to credit growth of around 10%-12% in nominal terms in 2014 and create business opportunities for the banks.
While Moody's expects that structural challenges related to high single-party borrower concentration levels, real-estate exposures and limited transparency surrounding local conglomerates will continue to leave banks susceptible to event risks, it also acknowledges that the banks possess sizable cushions to protect against unexpected losses.
Moody's says that the Omani banks will maintain sound capital buffers over the next 12-18 months, as internal capital generation will largely match asset growth of 10%-12%. With a system Tier 1 ratio of 12.6% and a 130% coverage of NPLs by loan-loss reserves as of September 2013, banks have sizable buffers to absorb unexpected losses.
The Omani banking system will remain primarily deposit-funded and liquid over the outlook period. Customer deposits amounted to 71% of assets in September 2013, while 28% of total assets were in the form of liquid assets. Furthermore, Moody's expects increased revenues from credit growth and stable provisioning requirements to offset pressure on profits from reduced interest rate margins and from rising operating expenses, as banks continue to build their Islamic banking franchises. As such, Moody's expects Omani banks will maintain strong profitability in 2014, with net profits to average assets ranging between 1.5-1.8%.
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