Oman’s banking sector continued to remain resilient despite challenging economic conditions, the Central Bank of Oman (CBO) stated in its 2017 Financial Stability Report.
Relatively improved crude oil prices, ongoing fiscal reforms, and satisfactory financial performance by the banking sector meant that the short-term risks to its financial stability further subsided in 2016, the report said.
“The banking stability index also show that on balance, the stability of the banking sector stayed intact as the sector remained well capitalised, profitable, and fairly liquid with low infection ratio during the year under review, the apex bank stated.
Despite some slowdown in the economic activities, the banking sector continued to expand with strong credit offtake, according to the CBO. Total Assets (net) of the banking sector exceeded RO 29 billion (Gross Assets RO 30.25 billion) at the end of 2016; thus, registering a growth of 6 per cent during the year. This growth is lower than previous years’ growth. However, deceleration in growth is not unexpected considering the challenging macroeconomic conditions faced by Oman and banks’ need to adjust to the new normal of lower oil prices and rising interest rates.
“Notwithstanding these short-term adjustments, the banking sector in Oman is set for solid growth over the next several years on the back of economic diversification under ambitious Tanfeedh plans and a relatively low banking sector penetration,” the report said.
The Central Bank noted the continued growth of the ‘Private Credit to Non-Oil GDP’ ratio during 2016. However, the existing level of corporate and household debt (in relation to the GDP) was far from excessive, therefore, the debt overhang remained highly unlikely and the increasing credit-to-GDP ratio indicates a positive development, it said.
Private Sector Credit to GDP Gap also increased during 2016. However, this does not signal build-up of system-wide risks as this increase in the Gap was driven largely by a sharp fall in nominal GDP (due to fall in oil prices) rather than excessive credit growth, it pointed out.
According to the report, banks in the Sultanate have been able to grow their lending portfolio without much increase in NPLs, which augers well for the credit risk in the banking sector. The NPLs at the end of 2016 were 1.78 per cent (2015: 1.73 per cent) of the gross loans. The low NPL ratio suggest satisfactory asset quality and well contained credit risk.
Moreover, the existing loan portfolio of banks is well covered against expected losses through adequate provisions with coverage ratio (provisions to NPLs) of 70 per cent (148 per cent including general provisions) which compares favourably with regional cohorts.
The degree of concentration in the Omani banking sector, as measured by Herfindahl-Hirschman Index (HHI), reflects that concentration in the banking sector in Oman is moderately high but remains in line with the regional cohorts, according to the report.
In order to deal with the risks emanating from the presence of large institutions, the CBO had issued guidelines to identify, supervise, and regulate Domestic Systemically Important Banks. Moreover, as a part of the preparedness, Bank Resolution Framework is being finalised to amicably deal with systemically important banks.
Sectoral distribution of credit, particularly in the household loan segment, highlights credit risk concentration in banking sector. Banks also have substantial direct and indirect exposure to the real estate sector. At present, overall, household credit risk indicators remain at low levels and there are no signs of significant stress in the Omani real estate market. Moreover, the prudential regulations on lending are expected to keep the risks in these sectors at manageable levels.
Amid a growing loan portfolio, the banks on average, comfortably maintained the cash reserve requirements without significant signs of strains, the CBO said. Liquidity conditions in Oman tightened because of the budgetary needs of the government and decreased inflows due to depressed oil prices. However, accommodating regulatory changes and external funding kept sufficient liquidity in the domestic market.
Banks operating in Oman have traditionally low reliance on wholesale markets. Government deposits, however, remained an important source of funding for the banks. The high level of public sector deposits combined with the reduced cash-flows of the government in the wake of dwindling oil revenues could pose a covert yet potent risk of significant withdrawal of deposits from the banking sector. However, the risk of withdrawal is not imminent as the government resorted to borrowing from international markets to finance its budget deficit. Moreover, the stress tests showed that the banks operating in Oman remained fairly resilient to the assumed deposit runoffs.
Following the Federal Reserve’s lead, the policy rates and interbank rates in Oman have started to increase. The rising policy rates have also been partially passed through to the retail deposit and lending rates. The rising interest rates might put pressure on the bottom lines of the banks. However, the stress testing exercise shows that the interest rate risk in banks is within reasonable bounds if they face a 200 basis point adverse movement in interest rates.
Furthermore, the banks remained adequately capitalised as the benchmark Capital to Risk Weighted Assets Ratio of the banking sector increased to 16.8 per cent at the end of 2016 from 16.5 a year ago. At the system level, even the Tier-1 capital was sufficient to meet the regulatory requirements, it said.
Despite challenging macroeconomic conditions, stringent prudential norms for credit, rising funding costs, and declining Net Interest Margin (NIM), the banks maintained their profitability, the CBO report noted.
“The banks netted over RO 438 million in pre-tax profits (2015: RO 439 million). The profitability ratios, ROA and ROE, remained steady at 1.5 per cent and 10.5 per cent, respectively. The healthy bottom line of the banks not only reinforced their buffers but also enhanced their ability to support future growth,” it stated.
Islamic banking in Oman achieved remarkable growth since its inception about four years ago. At the end of December 2016, the Islamic banking assets formed 10.3 per cent of the total banking sector assets. With an annual growth of 37 per cent, total assets held by Islamic banks and the Islamic banking windows of conventional banks exceeded RO 3 billion, while the total assets of foreign banks stood RO 1.9 billion at the end of 2016, it said.
Islamic banking institutions (IBIs) recorded remarkable improvement in profitability, according to the CBO. The aggregate pre-tax profits of IBIs during 2016 increased to RO 13.6 million from RO 1.6 million in 2015. Due to fast paced growth, the Islamic banking sector as a whole is gaining systemic importance, the report said.
Despite the prevailing macroeconomic challenges, the banks remained resilient to stressed scenarios at the aggregate level, the report said. Results of different solvency stress tests did not flag an increased vulnerability of solvency of the banks mainly due to their high capital adequacy ratio as well as their limited exposure to equity and forex. The robustness of the banking sector is also echoed in the macro-financial stress tests where banks on average remained solvent even in the severe scenario, the apex bank said.
When assessed with respect to the international benchmarks (of one business week or five days), all of the banks were found to be in a comfortable position to face the liquidity shocks under the assumed stress scenarios. At the end December 2016, the banking system as a whole would be able to sustain a liquidity shock for an average of 18 days with only cash and a total of 20 days with cash and securities, it noted.
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