Continued stable outlook for Omani banks

The outlook for the Omani banking system remains stable, reflecting its remoteness from and relative resilience to the recent global economic turmoil, Moody's Investors Service said in its new Banking System Outlook on Oman. The stable outlook also incorporates the challenges faced by the banks to expand their franchise and maintain good credit quality metrics in a small, narrow and highly concentrated market.
The global financial crisis posed minimal risks for the performance and ratings of Omani banks, as the country is an introverted market and local banks have little exposure to western markets. The economy remained resilient throughout the downturn and is likely to experience growth in 2010, which the rating agency believes will improve the banks' operating conditions.
"For 2010, Moody's expects systemic credit expansion to gradually increase to 10%-15%, although it will likely remain below the pre-crisis level of 40%. The resumption in loan growth will be driven by increased government spending, which was largely concentrated on the hydrocarbon sector in 2009, but also focused on the non-oil sector as part of the government's measures to diversify the economy," explained Elena Panayiotou, author of the report.
Direct government intervention was not needed in during the global crisis. However the Central Bank of Oman (CBO) has demonstrated its support through intervention to encourage lending and provide dollar liquidity to the banks. This mitigated the impact of the global economic downturn and helped the banks to maintain relatively robust financial fundaments.
Moody's believes that Omani banks will continue to enjoy strong capital levels and a high loss-absorption capacity, which is a key factor supporting their BFSRs. In addition, the government's proven track record of support towards Omani banks reinforces Moody's assumption of a high probability of support, and provides an uplift to the deposit ratings of those banks.
"Going forward, the banks are likely to move away from the foreign-currency funding facility provided by the CBO as part of a US$2 bln dollar liquidity facility, which it established towards the end of 2008 to provide banks with foreign-currency funds," Panayiotou added.
Despite these positive developments, Omani banks are highly concentrated in their local market, which remains vulnerable to the performance of the hydrocarbon sector. In addition, contagion risk is high because there is considerable interlinkage between wealthy families, the banking system and the government.
"For 2010-2011, we expect that good macroeconomic growth will create beneficial operating conditions for Omani banks, and that the government will accelerate its financial support, primarily for infrastructure projects. However, banks' interest-rate margins could remain pressured by intense and concentrated competition, while sizeable lending and funding concentrations will raise the banks' risk profiles," Panayiotou concluded.