Unfortunately for Oman and its banks, there seems to be little prospect of the oil price bouncing back anytime soon
Oman’s economy is one of the most vulnerable to low oil prices in the Gulf. The government is thought to need a price of more than $100 a barrel to balance its books and it has more limited savings to draw on than most of its neighbours, equivalent to less than two years of government spending.
Such issues would not matter quite so much if the economy and the banking sector were not so heavily dependent on the state. Government spending will be equivalent to 50 per cent of GDP this year, the highest level among all GCC countries according to Moody’s Investors Service. And the country’s banking system also leans heavily on the government, with 29 per cent of deposits coming from the state.
Unfortunately for Oman and its banks, there seems to be little prospect of the oil price bouncing back in a sustained manner anytime soon. Dr. Qais Al Yehyei, head of the financial stability department at the Central Bank of Oman, described the situation at “a temporary set-back” in a statement issued in June, but since then the oil price has fallen even further.
The rather bleak outlook has led some analysts to downgrade the prospects for the banking sector. In late August, Fitch Ratings lowered its rating on five of the country’s banks, after reviewing the government’s ability to support them. The institutions affected were Bank Muscat, National Bank of Oman, BankDhofar, Bank Sohar and Ahli Bank. HSBC Bank Oman didn’t suffer the same fate, because of the support it can expect from its parent company HSBC Holdings, but the outlook on it was still revised down from stable to negative.
Local bank executives say they’re frustrated by the downgrades, saying they don’t reflect the reality. Certainly, the sector is still growing. The central bank says that the overall value of assets in the banking sector continues to increase, as does the amount of deposits they hold and the loans they are making. Provisions for bad debts has even reduced slightly this year, falling to 3.4 per cent in the first quarter of 2015 compared to 3.6 per cent at the same time last year. “The sector as a whole has displayed consistently profitable growth, underpinned by strong capital ratios,” says Lloyd Maddock, chief executive officer of Ahli Bank of Oman. “The sector can be stated to be in good health.”
Other senior executives also insist that the banking sector is sound, but the risks in the current environment are still clearly apparent to those involved. “The banking sector as a whole in Oman remains resilient owing to high capital buffers, low non-performing loans and healthy liquidity levels,” says Rashad Ali al-Musafir, acting CEO of Bank Sohar. But he adds that “lower oil prices are testing the resilience of all countries dependent on hydrocarbon exports.” “Payments from the government can be expected to slow down, which can directly impact the receivable levels for companies handling government projects,” he says. “This contraction may also place significant stress on company balance sheets and their ability to make timely payments, which in turn can create additional downstream stresses with the SME sector.”
For now, the central bank is doing its best to reassure the market that there’s nothing to be concerned about. In its most recent review, published in June, it said that it had carried out a series of stress tests on the country’s banks and had found no imminent problems or threats. Its report concluded that the banking sector was in good health, with a capital base of about 16 per cent of total risk-weighted assets, a return on assets of 2.2 per cent and a return on equity of 14.7 per cent. The “macro-financial system looks sound,” said Dr. Al Yehyei at the time.
Beyond the numbers quoted by the central bank, there have been some other signs of the sector’s strength. Last year, for example, the banks reasserted their position ahead of the local stock market in terms of providing corporate funding. In both 2012 and 2013 the Muscat Securities Market had provided more finance for local businesses than the banking sector, according to statistics from the Capital Markets Authority. However, with total bank lending almost doubling in 2014 compared to 2013, rising from 567 million Omani rials ($1.5 billion) to 1.1 billion Omani rials, and capital market funding slipping back from 1.2 billion Omani rials to 907 million Omani rials, the trend was reversed.
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