Lenders' profitability over the long term is expected to take a hit after new central bank regulations
Asset growth of Omani banks set to accelerate this year and next
Asset growth in Omani commercial banks is set to accelerate over the rest of the year as well as in 2019 as higher economic activity spurs lending, according to research firm BMI.
“Higher oil prices and broader hydrocarbon production gains will enable higher capital spending by the government, and will support stronger business confidence,” BMI said in a note on Friday.
Oman, one of the two small non-Opec producers in the Gulf region besides Bahrain, derives much of its government revenue and liquidity from its hydrocarbons exports. Oil prices, which have recovered to $75 per barrel this year have buoyed economic activity in Oman. The Arabian Gulf nation has set up an oil trading unit and diversified into the large-scale refining and chemicals sector to promote growth.. Real gross domestic product growth will gain momentum, growing 2.8 per cent in 2018 and 3.5 per cent in 2019 from an estimated 0.6 per cent in 2017, noted the report.
Asset growth in the Omani banking sector, which has largely enjoyed a positive outlook for the first half of the year will gather pace, growing at 5.5 per cent and 6.5 per cent in 2018 and 2019 from 3.3 per cent last year.
However, profitability at banks is expected to take a hit due to the Central Bank of Oman’s policy on capping commercial loan rates. This directive will encourage greater sectoral specialisation, the report noted.
Greater asset growth over 2018-19 comes in stark contrast to the tepid performance of the Omani banking sector during the second half of 2016 and first half of 2017, when it was hit by the slump in oil prices. Oman had been particularly susceptible to the decline in oil prices, which fell to $29 per barrel levels after $100 per barrel levels in 2014 as the country has one of the higher break-even prices for oil in the Middle East.
BMI noted that an uptick in the construction industry will encourage lending to the sector, which is set to grow by 10.4 per cent in real terms in 2018 and 11.5 per cent over the next year, which is well above the average for the Middle East and North Africa region. A steady pipeline of infrastructure projects in the sultanate will also underpin any increases in business credit demand.
However total credit growth is expected to lose its current momentum over averages seen in the long-run, with a slowdown in recent quarters in personal loan growth dragging down overall lending. BMI put the drag down to central bank regulations, which have stipulated that personal loans only account for 35 per cent of commercial banks’ total credit portfolio, down from 40 per cent in 2013. While risks have been managed rather successfully by the larger banks such as Bank Muscat, for which personal loans account for 27.3 per cent of total credit, smaller lenders in the country are squeezed to the limits, restricting further potential for loan growth.
With tighter profit margins, banks will move towards increasing sectoral specialisations. BMI anticipates a rate hike in Oman, with the central bank expected to increase its policy rate over 2018 and 2019 to support the rial’s value and reduce any tax-induced inflationary pressures. Oman earlier this year introduced new fees and taxes for individuals and businesses based in the capital Muscat. International hotels, restaurants and tourist centres are also subject to the new tax measures.