Rating agency cites slowing credit growth and reduction in government capacity to support banks as reasons for change
Oman’s banking system outlook changed to negative, Moody's says
Moody's Investors Service on Tuesday changed its outlook on Oman’s banking system from stable to negative, citing prospects of a sharp fall in the pace of credit growth and the diminished capacity of the government to support banks in the sultanate on the back of softer economic conditions.
"We expect a softening in Oman's operating environment, with fiscal consolidation amid prolonged oil price weakness weighing on economic growth," Mik Kabeya, an analyst at Moody's said in the latest report on Omani banking system. "This will weigh on credit growth, which we forecast to fall to 5 per cent in 2017, down from 10.1 per cent in 2016 and 12 per cent in 2015."
The ability of the Omani government to support lenders, should a need arise, is curtailed by fiscal deterioration, and that was reflected in Moody's downgrade and negative outlook on the government's credit rating in July.
The rating agency said the change in the outlook on Oman’s banking system reflects its expectation about how bank creditworthiness will evolve in the country over the next 12 to18 months.
Oman, which is largest oil producer in the Middle East outside Opec, relies heavily on the sale of crude for revenues like its GCC peers. The persistently low oil prices have forced the country to cut spending and a subsequent slowdown in the economy has resulted in weaker credit growth and a rise in problem loans.
Bad loans in Oman are expected to rise to around 3 per cent of gross loans in 2017-18 from 2.1 per cent at the end of March this year, according to Moody’s, which added that high concentrations of loans to single borrowers, particularly in the real-estate sector, pose downside risks to asset quality.
Profitability for Omani lenders will also remain under pressure and is likely to decline slightly, according to Moody’s.
“Net interest margins will likely remain stable at around 2.4 per cent over the outlook horizon as higher lending rates offset increasing funding costs, while loan-loss provisioning will increase somewhat as problem loans rise,” the rating agency said.
Funding and liquidity conditions will remain tight, as high domestic government borrowing limits the funds available to be lent to the wider economy. However, the government's international bond issuances, slower credit growth and higher oil prices will moderate the pressure.