Prospects for Oman’s banking industry look positive, with recent IMF findings pointing to high capitalisation, low non-performing loans and strong liquidity buffers.
“Although private sector credit growth has somewhat moderated, and interest rates are likely to increase as US monetary policy normalisation continues, banks’ credit growth is expected to remain healthy,” said the concluding statement of the IMF’s 2018 Article IV consultation released on July 6.
Indeed, the loan portfolio of the country’s conventional and sharia-compliant banks has registered solid expansion, according to the June bulletin of the National Centre for Statistics and Information (NCSI), which showed lending up 7.7% year-on-year (y-o-y) at OR24.1bn ($62.3bn) in April.
The IMF expects private sector credit growth will remain relatively steady over the next five years, lifting from 6% in 2018 to 6.8% in 2020, before slowly trending downwards to 6.2% in 2023. While solid, these rates of expansion are around half those posted in the 2014-16 period, when they averaged 12%.
A key driver of liquidity and credit growth was the easing of lending ratio requirements, initiated by the Central Bank of Oman (CBO) in early April this year.
The amount of capital required to be ring-fenced as a share of lending portfolios was lowered from 12% to 11%, a move that could add around OR7.8bn ($20.3bn) of new liquidity to the market.
The relaxation of the lending ratio should also allow banks to determine interbank positions for lending ratio purposes by including borrowings and placements from other commercial banks as part of their deposits base.
This is expected to allow for greater credit expansion, according to industry officials, as it would encourage banks to increasingly borrow from and lend to each other, subsequently activating the interbank market.
While lending growth accelerated in April, the longer-term impact of the CBO’s actions are more likely to be reflected in the results from later in the year. Credit expansion could support stronger year-end bank earnings, potentially lifting lenders after a relatively flat 2017.
Last year saw sector profits rise by an estimated 3%, the slowest pace in more than a decade, with some banks reporting near-flat earnings growth or even a modest decline.
This deceleration came as GDP contracted by an estimated 0.3% last year, according to the IMF, on the back of lower hydrocarbons earnings and a drop in output. While GDP growth is projected to rebound to 2.1% in 2018 and 4.2% in 2019, the economy nonetheless remains largely reliant on oil revenue, and a repeated period of negative growth could put pressure on the financial industry.
To ensure the continued resilience of the financial sector, the IMF underscored the importance of ensuring that the prudential framework and financial sector buffers remain strong, recommending that the CBO strengthen its liquidity and crisis management.
The reserve bank has seen some erosion in its liquidity position over the past year, as foreign assets fell 10.2% y-o-y to OR6.6bn ($17.2bn) at the end of April, according to the NCSI.
In addition, medium-term projections for the domestic oil and gas industry highlight the need to do more to raise the private sector’s profile in supporting growth and economic diversification.
While the IMF forecast an increase in oilfield production from an estimated 970,000 barrels per day (bpd) this year to 1.06m bpd in 2023, it also expects energy sector revenue to track downwards. Forecast earnings of $25.9bn in 2019 – up from a projected $25.3bn this year –are set to ease to $23.1bn by 2023 on the back of lower international prices.
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